The global hotels sector faces a $5bn syndicated bank debt repayment burden owed by as few as 17 companies and due to mature by the end of this year, with a further 54 hoteliers owing almost $12bn maturing by the end of 2010, according to a new analysis* by international law firm Freshfields Bruckhaus Deringer. The figures are part of 320 debt maturity deadlines worth a cumulative $76bn, held by 167 of the world’s leading hotel groups and falling due within the next five years.
Of the 320 worldwide tranches of maturing debt due by 2014, the UK hotels sector accounts for 12% with a value of $8.0bn, of which 15 ($3.7bn) are due for maturity by 2010. This places the UK second internationally, after the US (136, $41.3bn), by number and value of tranches due within the next five year period. Other countries facing high levels of syndicated bank loans maturing by 2014 include France ($6.3bn); Japan ($5.2bn), Canada ($4.7bn) and Spain ($3.2bn). (See tables 1 and 2)
Adam Gallagher a restructuring partner at Freshfields commented: ‘Credit markets have begun to thaw, thanks, in large part, to an increased willingness by shareholders to provide equity funding rather than risk losing their equity to creditors. The corporate bond market has also been stepping into an increasing number of distressed situations. However, debt refinancing remains far from straightforward and poses considerable challenges in the current economic context’.
‘The debt burden facing many hotel groups around the world is especially acute given the effects that the global downturn and recession have had on the travel industry at large and that have been exacerbated by the impact of the H1N1 virus. Latest industry figures** show a 7.6% decrease in international air passenger traffic for the 12 months to July 2009 compared to the previous year. While affecting the airline industry, this has triggered a serious knock on effect on the hotels sector too,’ he continued.
‘Recent years have seen the global hotels sector invest heavily in new developments and offerings, often in economies that for one reason or another were yet to become fully established on the global tourist trail. As a result of the downturn, declining travel trends, especially among business customers, unexpected events such as the outbreak of H1N1 and falling real estate values, many of the deals financed in the good times are now looking rather shaky and stressing their covenant pressure points,’ said Gallagher.
Jeffrey Rubinoff, a partner in Freshfields’ banking practice added: ‘The evolution, over the last few years, has been for hotel groups to separate operations from property ownership and this has left many investors in hotels assets vulnerable to the global devaluation of property assets. This has exacerbated the negative impact of trading conditions, making refinancing without a considerable injection of new equity extremely challenging.’
‘Similarly, hotel operators who had thought that such a separation was a benign strategy for raising development capital by selling the hotel assets whilst retaining the management contracts, are facing uncertainty over who will own and maintain their buildings in the medium to longer term,’ added Rubinoff.
‘Debt for equity swaps have been a relatively common practice over recent months but fundamentally the business model of banks is not to hoard assets they then need to sell, but to make money through lending. To deal with the looming debt maturities facing international hotel groups we are bound to see cases where covenants are reset with relatively minor adjustments, but where deeper balance sheet issues exist more radical restructuring exercises will take place,’ concluded Gallagher.
Click here to view the table which shows deal values and number of maturity tranches by nationality.
Click here to view the table which shows the cumulative deal values and number of maturity tranches by year of maturity.