The lack of debt finance remains the dominant factor holding-up hotel development, according to speakers at the International Hotel Conference held in Venice last week.
And one banker attending was candid enough to confess that banks are more focused on asset management than on lending. This banker also said that the current market offered the greatest opportunities he had ever seen.
Where banks are prepared to lend, it is on very different terms to two years ago. A trading history is preferred – if not in reality essential – and at least a third of the deal value needs to be equity.
Borrowers need to have real risk and the business being financed has to have the cashflow to service the debt. An EBITDA to debt multiple of six times is the usual maximum although on occasions this may be pushed closer to eight provided the property is a prime asset in a prime location.
As delegates pointed out, there are few deals available that meet these lending criteria. And there are limited expectations of distressed deals coming onto the market that might meet these criteria, at least in Europe.
Distress sales were already under way in the US but European banks had historically sought to avoid such disposals and it was expected a similar pattern would be followed this time.
The scale of the debt on the balance sheets in Europe meant losses could not easily be written-off and banks would instead spread the losses over several years. Banks would often prefer to hold and trade assets rather than sell at what they considered was a poor price, said one banker.
"We have seen some offers at one-third of construction costs. The market is at two different levels, one group buying for the long-term and the other buying on a pure vulture basis," said one banker during a break-out session.
Banks were currently often choosing to do a "drains-up" business review following covenant breaches. But provided the banks were confident on the management team, then the banks will choose to work out the loan.
Any loan made after July 2006, and possibly after January 2006, was now under water on a loan-to-value basis, reckoned Rod Taylor of Taylor Global Advisors. "I genuinely believe banks are trying to save businesses. If they do lose patience with our sector then there will be a huge problem," he warned.