What does the collapse of SVB and Credit Suisse and the latest rise in Interest Rates mean for the availability of debt in the Hotel Sector?
The sudden collapse of SVB and Credit Suisse was a bit of a wake-up call! Despite reassurances from the Bank of England that UK Banks are strong institutions, the markets are still looking for vulnerabilities in the banking sector, surely adding pressure to bank’s appetite to lend money. This comes at a time when interest rates are at their highest since October 2008. For a decade, the finance cost to a lender holding onto an under-performing debt, was minimal (base rate was less than 1% from 2009 to 2022), however it is now substantially higher and we have seen recent examples of banks looking to encourage refinancings of hotel debt when covenants come under pressure, or insisting on the addition of equity before agreeing to refinance at more affordable levels.
Even marginal hotel transactions worked when base rates were sub 1%, but more marginal structures, will struggle at 4.25%.
So what behavioural changes are the team at HotelFinance seeing in the lending market ?
It is encouraging to see many hotels, particularly in key cities, are experiencing record ADR’s and strong demand, but inflation, staff shortages and rising costs are squeezing profit margins. We are speaking to many more clients about covenant breaches and the opportunity to refinance.
What we are seeing are lenders forming firm views on who in their existing portfolios they feel they can support with additional funding. This might be based on their view of management teams, the successful recovery from the Covid lockdown era, borrowers who have access to other funds, etc. This is leading to more of their clients being asked to raise capital or to refinance. When looking at NEW acquisitions, refinances and development loan proposals, lenders are asking far more questions than we have seen previously. They deep dive much further into revenue and profit assumptions and they sensitise forecasts with more challenge.
Therefore, engaging professional advisors such as HotelFinance who have significant banking AND hotel experience can be invaluable. They will provide a degree of rigour around the plans and forecasts and give comfort to the lender that this additional layer has weeded out propositions which won’t work!
We work with dozens of lenders in the hotel space, and we have seen recently, many lenders restricting their lending appetite to what they regard as “Best in Class” – which may be driven by location, management team, the mix of business, or brand, or all of the aforementioned. There is often only one opportunity to present a proposal to a lender, as the lender will be influenced by the quality of that first interaction. So that first pitch is really important, as is matching the lenders with specific appetite for the scheme.