December 2001
Jim Butler is Chairman of JMBM�s
Global Hospitality Group. He leads a team of more than 50 lawyers who work
on virtually every aspect of hospitality � a team with more than $20 billion
in transactional hospitality experience. Jim is more than �just a lawyer.�
He is a �hospitality consultant and businessman with legal expertise� with
more than 30 years of focus on hospitality, real estate and finance. In
the wake of the September events and their aftermath, Jim predicts a delayed
recovery for the industry, and �pockets� of severe difficulty for some
and opportunity for others. In this exclusive interview, we also received
Jim�s eight predictions for �living in the wake� of the September 11 events. |
James R. Butler, Jr.
|
GHG Advisor:
Jim, the entire nation is struggling to move beyond the terrible losses
of September 11, and heed the President�s call to �get back to work.� Beyond
the sheer enormity of these events, what are some of the practical implications
of the terrorist attacks and the ensuing events for the hospitality industry?
Jim Butler:
It is hard to get past the tragic loss of human life and the devastation.
But there are significant practical implications of these awful events,
America�s war against terrorism, and the sometimes paralyzing uncertainty
and fear that haunt the country.
What has happened? We have events with the financial
impact of the S&L Crisis�with immediate costs alone soaring over $100
billion. We are fighting a war of unknown duration and scope. And, we are
living under the uncertainty of ongoing terrorist threats. In the immediate
aftermath of September 11, more than 100,000 people were laid off by the
airlines and travel was down by more than a third. The travel, tourism
and lodging industries were hardest hit.
One respected national firm predicted the worst
performance for the hotel industry in 33 years. Most hotel stocks lost
between 20% and 70% of their value in the first week of trading after the
attack. Many hotels and restaurants have laid off or furloughed sizeable
portions of their workforce as they watched their business fall by 40%
or 50%. Conventions, meetings and vacations were canceled or postponed.
GHG Advisor:
We will undoubtedly be sorting out the implications of the terrorist attacks
and America�s response for months to come, but can you share any predictions
or observations with us?
Jim Butler:
On a macro level, these events have aggravated a recession already in progress
and delayed recovery at least until the end of 2002 or even 2003. The impact
is uneven, disproportionately affecting the luxury and high-end segments,
tourist destinations such as New York, San Francisco, Orlando and Hawaii,
and certain convention and meeting businesses.
GHG Advisor:
And what specifically do you predict will be the impact of these events
on the hospitality industry from a business and legal perspective?
Jim Butler: A
few trends have already emerged. I see the following eight developments
for our near term:
Workouts, receiverships and bankruptcies loom
for many. Generally, the experienced workout teams of the 1980s and
1990s have moved on. Lenders and servicers are scrambling to staff up with
expertise for troubled loans on special purpose real estate with operating
businesses, such as hotels, senior living facilities, franchised gas stations,
restaurants and convenience stores. Initially, borrowers and lenders hope
the slowdown will be short-term and that only marginal properties will
falter, but if business continues to be slack, many properties will be
unable to meet operating expenses and debt service. |
Securitization has changed how troubled loans
are processed and what can be done with them. Since 1993, Wall Street
has fueled billions of hotel financing. It has been securitized and placed
into REMICs governed by restrictive federal tax rules, servicing agreements,
and rating agency guidelines. There is no friendly local banker to talk
to about a workout, note sale or deed-in-lieu. These structured finance
entities are highly regulated as to when and what they can do with troubled
loans, and may induce otherwise unnecessary bankruptcies. A premium will
go to those who understand securitization issues in the next downturn. |
Bankruptcies will raise difficult cram-down
and valuation issues. There will be valuation and cram-down issues
of first impression for Chapter 11 cases involving the hospitality industry.
Debtors trying to ride out the current downturn may well be able to convince
bankruptcy courts to extend maturity dates on debt for as much as five
to ten years, and may seek principal reductions of the creditor�s secured
claim. The success of such cram-down plans will hinge on the court�s view
of the current economic dip and the debtor�s future cash flow projections�what
are permanent or long-term effects of our circumstances and what are relatively
short term consequences. Impatient lenders should expect more successful
cram-downs than in past downturns. |
Focus on management and franchise issues.
Massive lay-offs and restructurings will affect the ability of many operators
to deliver expected results to owners. Uneven application of brand standards
and demands for major capital expenditures will stress owner-operator relationships
as properties fail to make debt service or meet operating expenses.
Heightened concerns over contractual and fiduciary duties will test relationships
and lead many owners and lenders to consider terminating or renegotiating
management and franchise arrangements. Troubled loans and bankruptcies
will enhance other business and legal grounds for owners to restructure
or terminate their management and franchise obligations. |
Labor and employment issues will become even
more important. Cutbacks in workforce will raise WARN Act and other
troublesome issues. Workers often see lay-offs and cutbacks as emanating
from discrimination, harassment, whistle-blowing, or other perceived employer
evils. Many employers will seek more flexible work rules and schedules,
and may encounter work force or union resistance. This is a good time to
review arbitration programs, employment policies and procedures and be
sure that management is well trained. |
Asset management regains importance. In
stressful times like these, there will be great value to wisdom in developing
and overseeing the implementation of sound strategies, marketing, pricing,
and working with operators. How can revenues be maximized and expenses
cut without permanent damage? Is this the time to cut or boost advertising
and sales efforts? How do you handle a brand�s lack of attention and support,
or senseless capital demands? What do you do about uneven application of
standards? |
Opportunistic investing is back. Funds
are already in place, and staffing is being refocused. Preferences run
to complete buyouts, but control positions or even minority investment
may be possible in limited situations. |
�Force Majeure� will be tested in many contexts.
This legal doctrine excuses performance by a party when there have been
Acts of God, war, and certain other acts. The doctrine will be tried with
new vigor in contexts ranging from insurance claims and management agreements
to union contracts and group bookings. What events are covered? What is
excused and for how long? What is the impact of a contractual provision
dealing with the subject or the absence of any provision? The stakes will
be high. |
The Global Hospitality Group(r) is a registered servicemark of Jeffer,
Mangels, Butler & Marmaro LLP |