• Debt debate bedevils conferences

The autumn hotel investment conference season drew to a close last week with the final major event on this year's calendar seeing debt financiers facing a grilling by a group of hotel owners.

The HOFTEL conference in London reflected a more balanced perspective on the current situation, with the banks arguing that while the current climate is difficult, next year will see changes.

Since the collapse of Lehman Brothers the debt markets have been frozen and no thaw is expected until the New Year. As one former banker remarked at HOFTEL, "The psychology and motivation of banks is to do nothing. Everybody is measured on liquidity at the year end."

He was, however, optimistic that by the middle of next year banks would again be building up their loan book.

An existing banker viewed the current situation as an opportunity for the hotel industry "to save itself". People had been making projections on an upward only trajectory, now there is a return to normality. The current difficulties were about people not understanding what normality was, he added.

Banks were still lending but it was being done to a lesser level and was more focused with most debt only available to core clients in core markets.

It was admitted that it was probable that some banks were using market disruption clauses to restructure loans as banks were losing money on many loans. "Banks are not averse to losing relationships if they need to for economic reasons," said the banker.

In his view debt had been under priced for years and now it was being repriced at a more realistic level. Given the falls in interest rates, this meant that the overall cost of debt was similar to where it was before the crisis more than a year ago.

The threat in the current environment was for deals where debt had been heavily swapped out. Here it was difficult to negotiate an exit for both the bank and the borrower. It might take three, four or more years for some deals to work through, it was feared.

A particular threat was the commercial mortgage backed security market where there was effectively nobody for the borrower to talk to. It is possible that fire sales will ensue.

An even gloomier prognosis was put forward a week earlier at Deloitte's 20th European Hotel Investment Conference. Nick van Marken, lead partner in corporate finance in Deloitte's hospitality division, said: "Greed has turned to fear. The news is uniformly bleak."

The cost to the financial services industry so far has been $1,000bn and other industries were now being impacted, said van Marken. So far 26 airlines had gone bust but he expected the number to more than double. For hotels, just $20bn of deals has been done so far this year compared to $100bn in 2007.

There had, however, so far been little distress in the hotel sector apart from the rapid shrinkage in the market capitalisation of listed hoteliers which globally had gone from $71bn in 2007 to $33bn in 2008.

Looking ahead, van Marken predicted a difficult environment. Trading is going to worsen, multiples and yields will depress further, covenants are going to be breached, there will be forced sales to pay down debt and raise cash, and there will be distressed sellers.

Roger Bootle, managing director of Capital Economics, spoke before van Marken and was just as gloomy. He forecast that the recession was going to be much deeper than many expect and it would take three, four or even five years before the recovery begins.

Inflation was no longer a threat thanks to the collapse of what Bootle viewed as a commodity price bubble. The bank bailouts would also not be inflationary, he predicted as wealth had been destroyed and the bailouts were simply helping in part to replace it. All major countries would experience deflation, he argued. And cautious bank lending would contribute to weak GDP growth

For commercial property, Bootle was similarly pessimistic stating he believed the outlook was similar to residential on which he has been a consistent bear. Residential values in the UK had reached a point of being 35% above the long run average. They had now declined by 13% and had a further 25% to fall, he said.

In the US, where residential values had hit 26% above long-term trend, the drop had been 18% already and there was another 10% to come. With the exception of Germany, most other European markets had similar overvaluations of residential property.

Barry Sternlicht, CEO of Starwood Capital, argued that Bootle was not pessimistic enough. He said that Starwood Capital started in the early 1990s when "real estate was a four letter word". But "back then real estate was isolated, now the problem is global".

While this is a different kind of recession – "this cycle will be longer and more brutal" -, he believed that there would be similar kinds of opportunities that there were almost 20 years ago.

Marty Kandrac, a managing director at the real estate group at Blackstone, said that there would be distress in 2010 and 2011 when the debt in deals done in 2006 and 2007 became due. "There will be a lot to look at," he predicted.

Ryan Prince of Realstar also warned that the prevalence of bond holders rather than banks with debt meant solutions would be very difficult. "You can't have discussions with bond holders," he said.

The world is moving back to a situation where hotels are viewed as a complex asset, added Prince. "We will be back to the same group of four or five buyers and not 50 who were chasing yields that are better than offices." Investors who didn't understand the complexity will be hurt, he predicted.

Barbara Cassani, executive chairman of Jurys Inn, challenged the negative consensus: "If you have a good business model then you are OK. Did you think the last two to three years would continue? Stop whining and get back to business."

Sir David Michels, a non-exec at Strategic Hotels, Jumeirah, Marks & Spencer and easyJet, said the current situation was extraordinarily predatory.

At the end of October, at the Annual Hotel Conference held in Manchester, Sir David said hotels were in for a sustained rough period. "Unusually, we are among the last to suffer. I believe our turn has come."

While the first thing to do should be to cut costs, the key exception was the sales and marketing budget. Sir David said that studies of previous recessions showed companies that increased sales and marketing came through downturns best.

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