• Amend and pretend

The default position for refinancing in the past year has been to reset where possible and return to the deal in a couple of years, according to speakers at Euromoney's hotel investment conference held in September.

The absence of new finance in the market and the complexity of some financing structures for recent deals has made it difficult to achieve solutions.

Moderator of the session, Andrew Carnegie, a partner at Clifford Chance, said the refinancing market would continue to be very difficult into 2010. "Mostly the way forward will be extension of existing facilities and restructuring of existing facilities," he said.

To obtain extensions and covenant resets borrowers will face an increase in margins and further fees. Existing borrowers need to plan to move forward realistically, stressed Carnegie.

Where cash flow was sufficient to cover debt service, resetting was often the best way forward and means that the problems can be push out to a time when (hopefully) market conditions were better.

Where debt service was not happening, there might be opportunities to create time by selling assets but in extremis a debt for equity swap would also be necessary.

Alan Hudson, a partner at Ernst & Young, said that some lenders now think they are effectively the equity providers and should therefore seek control.

But the possibility of further downturns and the complexity of some deals was causing a pause. The complex structures that have grown up in recent years were only being understood properly for the first time, said Hudson.

Julian Gething, a partner at Talbot Hughes McKillop, said that for some holders of credit default swaps there was an incentive to trigger a default by the borrower.

During the debt panel, Shaun Hendry, business partner at Clydesdale Bank, said that the appetite to lend was there but the amount of existing distress meant that it was hard for borrowers to meet the requirements the banks had put in place.

He also admitted that banks were focused on sorting out the distress and they would rather work with and restructure existing debt before taking on new. "I don't see the logjam moving until next year when banks get exasperated with clients," he said.

This exasperation might follow a difficult winter, he believes, as the summer has buoyed UK hotels thanks to a strong leisure business in the UK. "Banks will take back the business when they don't see the business returning from bad bank to good bank."

Peter Anscomb, head of hotel finance at RBS, was more bullish on the prospects for fresh borrowing pointing out that there is a UK government requirement to make loans. "We have an appetite for new transactions and some appetite for development," he said.

For existing deals there was a preference to work through, said Anscomb. So far, the volume of receiverships had been small compared to expectations in some quarters.

Barbara Levi from Calyon took the controversial position of claiming that although banks were willing to lend, nobody was proposing any deals. She said the French government was exerting the same pressure on French banks as was the case for UK banks by the UK government.

The panel admitted that margins on lending had increased and so too had the fees such as arrangement fees. The requirement on borrowers to hedge against interest rate increases was also making borrowing more expensive.

If debt is both harder to obtain and more expensive, will equity take up the slack? For Jon Hubbard, managing director for Northern Europe at Jones Lang LaSalle Hotels, equity is not going to be the new debt.

Restructurings will see debt for equity swaps but this was unlikely to drive the transaction market, he said. Distressed sales, however, would help and so too would the willingness of creditor banks to provide stapled debt. To really help things move, equity returns needed to be re assessed, he added.

The banks had "moved in" on property companies and hotel companies would soon also come to the attention of banks as the institutions work their way through their loan book assessing previous deals.

One reason the wave of receiverships had not (so far) occurred in this downturn compared to previous ones was thanks to the ability of operators to remove costs. Frank Croston of Hamilton Hotel Partners said that, in general, the operator community had responded quickly in cutting costs and in adopting aggressive sales and marketing techniques.

The cost cutting could have an impact at the unit level, he warned. And there could be a sharper division between winners and losers among asset light operators who now depended on an equity free fee flow, said Croston.

Ciaran Fahy, general manager of the Cavendish, was sceptical about the value that brands brought in the current downturn. He argued that their key selling point was the corporate travel programmes but these were dramatically down.

"Key accounts at my hotel have dropped volume by 50%. This business has not gone elsewhere and we have refused to drop price," said Fahy. Instead, leisure business brought in via third parties such as Expedia or Superbreaks have replaced lost corporate business. Fahy admitted the commissions were high but he tried to mitigate this by extending the length of stay.

Paul White, CEO at Orient Express, said that internally the most important performance indicator was revpar. As a US listed public company, however, there had to be a focus on communicating the cost cuts.

While White said he was concerned about how quickly corporate transient business would return, David Sylberg, head of M&A at Accor, said the business climate would rebound by the first quarter of next year and operator cash flows will have stabilised.

He believed the gap between buyers and sellers was now closing after 18 months of wait and see. Accor was poised to close a number of transactions on mid-size portfolios up to Eu100m. Raising debt on deals above this level was a "nightmare" he admitted.

Equity was now accepting an 8% cash-on-cash return and the boom years capital appreciation model was dead, said Sylberg.


HA Perspective: A phrase that popped up during the conference was "amend and pretend" regarding debt structures. And there was a view that the amending and pretending might mean significant volumes of trade can be put off for as long as four years.

Whether things pan out this way remains to be seen. It certainly feels at present like the banks are more determined to work through problems than they were in the 1990s crash. But this might simply be because we remember the end of the period most acutely and we are only in the beginning of this phase of restructurings.

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