London, 25 November 2020: Hotel insolvencies caused by the pandemic are likely to increase through 2021 according to experts speaking at a global webinar held yesterday [24th November] organised by HVS, AlixPartners, Bird & Bird and EP Magazine.
Since the outbreak of the Covid-19 pandemic there have been relatively few insolvency situations in the UK’s hotel sector. However, most of the speakers expected this to increase next year, while a poll of the 400+ executive delegates revealed that 77% expected levels of insolvencies to start rising in Q2-Q3 2021.
Graeme Smith, managing director of AlixPartners was more upbeat as lower leverage levels had given the sector greater ability to absorb the shock of the pandemic. He believed recovery in hotels would be rapid once the vaccine rolled out. “There has also been significant Government support and protection for the benefit of borrowers, so currently this is a liquidity crisis rather than a solvency crisis,” he said.
A panel of experts chaired by HVS chairman Russell Kett and made up of hotel investors, operators, lenders and other experts agreed that the importance of transparency between stakeholders – shareholders, lenders, management and landlords – was of paramount importance, creating a supportive environment for hotel businesses to ensure their survival.
Factors likely to trigger insolvency were identified as high levels of debt, a high loan to value ratio, high levels of rent payments, volatility of values, liquidity and the cost of getting businesses back on their feet.
“Liquidity is the biggest challenge and the relationship between sponsor and bank – there has to be a limit as to how much cash banks can put into these deals,” commented Andrew Robb, chief business development officer with hospitality management company RBH.
Likewise, the importance of landlords and tenants working as a team was cited by several panellists along with transparency with lenders. “Lenders need to have the full information to buy into the future,” said Louise Gillon, head of hotel finance with Bank Leumi UK.
Kett pointed to a new, much more commonsense approach prevailing when it comes to loan-to-value, as high leverage made the relationship between lender and operator more volatile. However, lenders were now working more closely with owners and operators to find a way of emerging from the pandemic intact.
Kett then questionned how Brexit would impact the sector and perhaps push some hotels further towards insolvency. While some panellists argued that the UK’s exit from the EU together with Covid intensified the need for more Government support, others believed the impact of Brexit had been diluted by the pandemic.
“Brexit won’t make that much impact,” said Bird & Bird partner James Salford. “People will still travel and we are seeing a lot of investment. Hotels still look like a very attractive asset class, much more so than other sectors.”
Andrew Robb agreed: “Brexit was a concern but there has been a number of job losses in the sector due to Covid so the talent pool has gone up making it less of an issue – there are now plenty of excellent people available who have lost their jobs,” he said.
“A further devaluation of the currency could be a good thing for hotels, the challenge of Brexit has been minimised by Covid,” agreed Bank Leumi UK’s Louise Gillon.
When it comes to whether the hotel sector and brands will fundamentally change as a result of the pandemic, the panellists generally agreed that while the staycation had clearly come back into vogue, it was too early to tell whether this was a lasting change.
Sharon Quinlan, head of corporate real estate with HSBC said that her portfolio of hotel assets were mostly in London and city centres although it has been coastal resorts and holiday locations that had recovered more quickly. “It’s too early to say if this is a longer-term structural change. City centres also rely on tourism but I do think that this will come back,” she said. “However, there is now a much greater recognition that the planet has a limited life and overseas travel is part of that.”
The webinar concluded with the experts urging operators facing a possible insolvency to talk to their lenders, offer full transparency, explore all options, prepare early, think about both short-term and long-term financing needs and acquire the necessary management skills to enable change if you need to.