Finance debate – banking on funding

Caterer and Hotelkeeper invited a number of leading figures from the worlds of hotels and finance to a round table discussion on funding, held at the London offices of Lloyds Banking Group, which sponsored the event. Daniel Thomas reports.

The term credit crunch has become everyday language, a handy catch-all term for the economic slowdown and its effects. But, used in its correct technical sense, it refers to the sudden reduction in the general availability of loans and the increasing cost of obtaining them.

This difficulty in accessing funding has affected many hospitality operators, leading some to complain that banks are not providing enough support for them during these difficult economic times, despite billions of pounds worth of Government support. The banks respond that finance is still available - but that the business case for new loans has to be more compelling than ever.

PLUMMETING PROPERTY MARKETThe property agents around the table kicked off the debate by revealing just how far the market had dropped since the heady days of 2007.

Robert Seabrook, managing director of Jones Lang LaSalle Hotels (JLL), said that, while there had been a marked change since June with a lot of sale decisions being driven by banks and equity advisers, overall sales are well down.

He pointed to JLL statistics that showed there were just £250m-worth of hotel sales for the first nine months of 2009, a huge drop on the £8b worth of transactions seen during 2007.

Former Hilton chief executive Michael Hirst, now consultant to property agent CBRE Hotels, agreed, admitting that transactions "have come to an absolute standstill", with CBRE's main work this year being in consultancy and valuation.

When it was pointed out that Egyptian-backed Britannia Hospitality paid £77.5m for London's Stafford hotel in September, Seabrook said this was the exception that proved the rule.

"The Stafford sale highlights the desire of foreign investors to get involved, but the price reflects the lack of product on the market," he said. "It's an admirable price, one you would have been happy with in 2007."

DIFFICULTIES ACCESSING CREDIT

Andy Townsend, chief executive of hotel management company Legacy Hotels, insisted that there were a "shed load of properties" that could come on to the market for cash buyers, but suggested that "banks are sitting on their hands, as they don't want to write off assets".

Townsend also said that there were some properties that were going for half their market price, but that "it is impossible to do the deal" because of the difficulties in accessing finance.

"A lot of these opportunities are only going to be there for a short time, before the buildings are completely knackered," he added.

This lack of credit will hit existing businesses as well as slowing down the property market, according to Laurence Beere, proprietor of the Queensbury hotel in Bath.

"You will see a lot of broken covenants over the next six to 12 months, over issues that would have previously been glossed over," he said. "From my point of view, getting re-financed as an independent business is nigh-on impossible. Until the banks bring the money back in, there will be no movement."

While acknowledging these difficulties, Hirst stressed that credit issues were affecting all sectors of the economy. "We should be pleased that the hotel sector is one of the last the banks have looked at - we are not being singled out," he said.

Jeremy Richardson, chief executive of Kew Green Hotels, said it was too easy to apportion all the blame to the banks. "We shouldn't be sitting around saying it is all the banks' fault," he said. "We benefited from an incredibly benevolent lending market and weren't telling the banks to stop lending us money."

Richardson also said it was unrealistic to expect leveraged deals in the current market. "Get used to the fact that you are going to have to invest more up front," he told the hoteliers.

But Danny Pecorelli, managing director of Exclusive Hotels, said banks needed to be more open about the reasons for the increasing cost of credit. "The cost of money - which has gone up owing to restrictive covenants and short-term loans - is all about extra margins for the banks," he said. "There are few hoteliers who can refinance with another bank, so the incumbent bank has got hoteliers by the short and curlies."

Catherine Martin, head of hospitality, leisure and healthcare at Lloyds, insisted that the bank would "openly talk about success fees", but added that "long-term debt is incredibly difficult for us to find".

Tony Burnell, relationship director for hotels and leisure at Lloyds, was quick to point out that finance was still there for the right projects. "There are definitely funds to be had for the right transactions," he said. "Our view of a good credit proposition may be different from some applicants', but we have an appetite for new businesses if there's a sensible deal to be done."

Burnell also addressed the oft-voiced fears that banks were not in the industry for the long-term. He insisted that Lloyds' brief was to work with clients through the economic cycle - not to exit and get short-term returns, but admitted that it had to take a "pragmatic view".

"Banks have to ask: do these operators have the ability to manage?" he said. "You have to have confidence in the management team - if there is a scenario where the management is not coping, the bank will use a consultant to help them get through that period."

But to hoteliers, the appointment of a consultant can be a bitter pill to swallow, according to Townsend. "The banks don't understand the sector so they appoint a consultant and then charge you for the privilege," he said.

This point was picked up by Beere, who said: "Banks have got to get back to having decent people on the ground, with responsibility to understand the sector."

While Martin pointed out that Lloyds had a specialist relationship team dedicated to understanding and meeting the specific needs of the hotel and leisure sector and a general credit team also well versed in industry knowledge, the comments highlighted the increasing tensions between some operators and their banking partners.

IMPROVING THE RELATIONSHIP WITH YOUR BANK

To improve this relationship, Beere advised hoteliers to be in constant communication with their banks. "Hopefully, the problems getting credit will drive people to talk to the banks more," he said. "Everything I have achieved is based on relationships - if anything you should over-provide information."

In response, Burnell said: "You would be surprised at the number of people who don't do that. I can't comment on things unless they tell me about them. There are times when you have to react, but being proactive is key."

Martin concurred, saying that the most important principle for a good working relationship was "no surprises".

"If you don't tell us we will ask ‘did you not see that coming?' and it makes us question your ability to manage," she said. "Relationship is key here. If your bank is not ringing you up, you should question them."

For Burnell, going out and seeing clients is "the best part of my job". "You can learn more by spending 15-20 minutes with the team than you would having a two-hour meeting with the manager," he said.

Pecorelli's advice was to have a relationship with more than one bank. "Lloyds is going to have a different view to Barclays or Clydesdale," he said, in a point picked up by Martin, who said having a second supplier was a "sound business principle".

Of course, every downturn has its winners, and for Legacy, business has been booming as owners look to rescue their failing properties, Townsend said.

"We have never been busier - we are generally getting six enquiries a week from asset managers forced by their banks to turn to a management company," he said. "We have a lot of short-term deals - some people are asking for one-month rolling contracts, which is ridiculous."

This increase in management contracts and third-party asset management has reopened the debate about the future of the hotel industry.

While Hirst said that "we are once again moving back to the owner-operator model", Townsend said that there were still a lot of bad operators out there, so "management contracts are going to be the only way forward".

Pecorelli, meanwhile, revealed that Exclusive Hotels, which is an owner-operator, was moving into management "because there is more money in it and it is easier to leverage".

"We have been approached a lot recently to do management contracts by banks because they are looking for good operators," he said. "It is a good way for us to expand at a time when funding is hard to come by."

Burnell said he preferred the personal relationship he could develop with an owner-operator. "When I am sitting in front of someone who wants me to lend them money, I need to know they have the ability to run the business," he said. "It's about looking someone in the eye."

Hirst described this as a "sea change". "It used to be the case that if you didn't bring a management company to the table, the bank wouldn't talk to you," he said.

Regardless of the business model, there is no doubt that accessing credit will continue to be an issue for the hospitality industry while the UK is in recession. But the round table debate showed that both operators and banks are determined to work on improving their relation­ship and, as Hirst pointed out, "all is not lost".

"There are some regional centres out there who are lending," he said. "I spoke to someone recently who was very excited about the sector."

TOP FIVE TIPS TO GET CREDIT

• Stay in regular contact with the bank - even if you're not a customer yet - try to avoid surprises, good or bad!
• Scenario-plan for best-case, expected-case and worst-case results
• Flag up potential hiccups before they become major problems
• Annotate your financial results and management information with your own interpretation
• Invite your banker to your place of business regularly

Source: Lloyds Banking Group

LLOYDS' VIEW ON GROWTH IN THE HOTEL SECTOR

Manu Choudhary, associate director, finance

Within the hotel sector, many firms have used the slowdown to reposition their brands.

The hotel sector is late cyclical in as much as it went into the down phase of the recession later than the broader economy and as such it is likely to trail the broader economy as it moves down the road to recovery. However, once we move out of recession, the sector should outperform the broader UK economy.

The weaker pound - down 12% against the US dollar and 9% against the euro in the past year - is helping to mitigate the downturn in foreign visits to the UK. While visits abroad by UK residents in the year to June were down 17%, foreign visitors to the UK fell less sharply, by 8%.

Although occupancy levels have been moving towards pre-crisis levels on the back of aggressive promotions, room rates are still low, with revenue per available room still down some 10-15% on average from pre-crisis levels.The skew of clients has shifted towards the leisure traveller.

Global economic recovery is likely to be gradual. Although prospects have improved, advanced economies remain dependent on government support for the banking sector. Household incomes and corporate profits are expected to remain under pressure and customers are likely to remain value conscious.

The hotel sector will be supported by the UK's upcoming "golden decade" of sport, with the hosting of the 2012 Olympics, 2014 Commonwealth Games, 2015 Rugby Union World Cup and 2019 Cricket World Cup. For the wider hospitality industry, we expect the sector to outperform the broader economy in 2010-12. Most of the growth is expected to be in 2011-12.

In terms of merger and acquisitions in the sector, people are still looking for deals and distressed assets, although right now the price may not be particularly distressed.