The second round of bank bailouts has again highlighted the frozen state of the credit markets. But while debt financing appears to be a glacier, there are trickles of water underneath.
Those banks that are committed to the hotel sector are doing some deals and stand to be significant winners when the recovery eventually comes.
The first bank bailout did not deliver on the promise of loosening the credit markets. But, rather than be viewed as a total failure, it has delivered a degree of stability. Evidence of this can be seen in the three month rate for Sterling LIBOR which yesterday was 2.11%, just 61 basis points above base. Banks are at least fixing reasonable rates to lend to each other, if not yet in the wider economy.
Of the current schemes for a further bailout of the banks, the plan mooted in the US of resurrecting the Troubled Asset Relief Programme to buy up "toxic" loans looks more straightforward than the UK approach of insuring banks against a variety of risks including loan defaults.
With both ideas there is the same problem: pricing the toxic loans. If the bank nationalisations happen in the UK – which the market seems to be pricing in – then this becomes slightly more straightforward, (although then there is the issue of how to privatise the banks).
Estimates of the scale of the toxic loans reach £100bn in the UK alone, an extremely scary number if the losses are crystallised. But although a loan is toxic, it may still have value. If it can be held until the markets recover, this value should be considerable.
The likelihood of success or failure of the bank bailout is somewhat outside the remit of this journal, other than to note that Paul Tucker, the new BoE deputy governor, said this week there was a "reasonable chance" of success.
With banks' capital underpinned and more cash made available to them, there is certainly a fair wind. The Bank of England is also engaging in qualitative easing – which means it is taking on a wider range of asset classes than it has previously accepted. Quantitative easing – shoving more money out into the market – also looks a fair bet.
Out there on the ground, would-be hotel investors can access debt, albeit in a much more constrained manner than in the recent past. Speaking to a number of big UK banks makes clear that some (although not all) of those previously lending on hotels are still intent on doing so.
One senior banker confirmed that committed term sheets have been issued in the past few weeks. Some deals are being done and while LTVs are difficult to obtain above 50% the overall cost of funding is similar to a couple of years ago thanks to the drop in base rate absorbing the increased margins being demanded by the banks. The margins are now typically above 350 basis points.
But it should be noted that the overall level of lending is considerably below the levels of the boom. Those banks still in the market are offering money and may step-up to lend at levels they were previously lending at. This does not, however, make up for the huge hole left by the departure of both foreign banks and those UK banks who have exited the sector. Estimates are that the existing UK banks had provided less than half the debt during the boom years. They are not going to double their lending.
The outlook for this year is one where the banks committed to the sector gradually increase their lending levels. It is expected that LTVs for select deals will creep up towards 60% – 65%. But the level of transactions which are funded by such relationship lending will undoubtedly be markedly down on a couple of years ago.
For the bigger portfolio transactions there still appears little appetite from any debt providers. This is going to create a torrid time for those seeking refinancing.
Where banks have provided a mix of funding, equity, senior debt and quasi mezzanine, it seems unlikely they will rush to pull the plug. An example might be the Alternative Hotel Group which is funded in this way by HBoS.
There is likely to be more heated discussion in situations where the debt financiers do not have an equity position. In such deals, the chances of a forced sale are much stronger if the debt funders are a group of banks wanting to recapitalise.
It remains far from clear how much worse things will become or how much longer it will take until there is a recovery. The banks created much of this mess but bashing those bankers who are still around and talking to the industry will not make things better. It is only with their help that there will be any recovery at all.