Hospitality industry: It’s check out time: Hospitality industry players eyeing lucrative deals from distress sales of hotels – The Economic Times

Clipped from: https://economictimes.indiatimes.com/industry/services/hotels-/-restaurants/its-check-out-time-hospitality-industry-players-eyeing-lucrative-deals-from-distress-sales-of-hotels/articleshow/86720891.cms

SynopsisHospitality industry players who want to expand their portfolio are watching keenly as they expect distressed companies to soon default on loans and come up for sale.

This festive season is likely to be distinctly uncheery for the hospitality industry. A large number of hotel owners are at risk of defaulting on their loans, according to a banker from an institution with high exposure to the hospitality industry.

The economic fallout of Covid-19 — curtailed travel and low occupancy rates — could be an opportunity for asset buyers and special situation funds who are readying to swoop on stressed and distressed hotel assets.

While the top names in the hotel business have been able to weather the pandemic, smaller chains, specially those focused on business travellers, are facing a reckoning. Gurgaon-based SAMHI Hotel — which owns 27 hotels focused on business travellers, managed by brands like Marriott and IHG — is backed by investors like Goldman Sachs, the World Bank’s International Finance Corporation, GTI Capital and Equity International. But with debt touching Rs 2,000 crore, one of the investors is looking at an exit option, says a person in the know. ET contacted Ashish Jakhanwala, its managing director, who denied the claims.

In August, ET also reported that Bharat Hotels that runs The Lalit is also looking to make a strategic sale. Hospitality consulting firm Hotelivate’s recent transaction advisory says it has at least 10 “sell mandates” across Mumbai, Rajasthan, Uttarakhand, Goa and Kerala of branded resorts to midscale hotels, ranging from 50 rooms to 400 rooms.

But buyers aren’t ready to take the plunge yet. “While there is a huge opportunity for investors, timing is critical,” says Patanjali (Patu) Keswani, chairman, Lemon Tree Hotels.

That’s because sellers are still not offering the assets at deep enough discounts, says Anoop Bali, executive di rector of Tou rism Finance Corporation of India, a leading non banking financial institution.

Bali says the government’s Emergency Credit – Line Guarantee Scheme (ECLGS) has improved the liquidity position of many hotel companies, letting them wait for the bounce-back that’s expected once Covid-19 restrictions are lifted.

About 70% entities in ICRA’s hospitality portfolio availed moratorium during the first wave, though it was only 39% of rated debt. Some companies also raised funding through equity and debt tie-ups before the ECLGS announcement. The industry has raised about Rs 660 crore of equity in FY2021 and has announced Rs 3,300 crore of equity/fund-raising plans in FY2022. ICRA expects further equity fund-raising/asset monetisation to support capital structure improvement going forward. However, debt metrics are expected to return to pre-Covid levels only over the medium term, while RoCE is exected to remain sub cost-of-capital at least for the next few years.

In fact, outstanding debt of the hospitality sector has increased to Rs 60,000 crore from around Rs 40,000 crore in 2018, and the ECLGS scheme would have added another Rs 20,000 crore, says Bali.

An ICRA study has found that 74% of hospitality sector companies have negative credit profiles.

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WAITING IT OUT

Bigger hotel companies, which run a mix of business and leisure hotels, benefited from the good performance of the leisure segment, which brought in revenue, and managed costs at the group level, says Jaideep Dang , managing director, hotels and hospitality group at JLL. “Cash flows of most hotels, especially in business markets, have remained under stress since March 2020. Debt servicing has remained a challenge on the back of falling and inconsistent revenues. Such stressful situations normally lead to asset transaction activity,” he adds.

Listed hotel players such as Indian Hotels, which runs Taj, EIH that runs The Oberoi and Trident brands, and ITC Hotels are in a much better situation in terms of financial flexibility.

IHCL in September announced a Rs 3,000 crore fundraising plan to meet its growth plans and debt repayment. EIH has used Rs 280 crore out of its net proceeds of the rights issue to repay/prepay some of its existing borrowings in 2020.

The board of EIH had approved fundraising of Rs 350 crore through a rights issue to shore up liquidity. Going forward, ITC’s hotel business plans to scale up through an asset light strategy.

The pace of deals is likely to pick up soon, says Sanjay Sethi, managing director of Chalet Hotels, which owns and develops high-end hotels for brands such as Marriott and is also scouting for distressed hospitality assets. Hotel owners who leveraged government relief measures are now finding those drying up, Sethi explains.

“Ideally, hotels would have come up for sale by now had it not been for the second wave. We too took a couple of assets to the market in late 2020 and were finishing the bidding process when the second wave started,” says Dang of JLL. No sales went through.

But for most potential sellers, the bid ask is still very high. Most business hotels that are in trouble sit on prized real estate. So only the groups that have a huge compulsion to sell will go to the market.

With room rates in most cases at 50% of preCovid levels, the situation is worsening, though. “I think the distress sales of hotels will happen more in the October-December quarter,” says Keswani.

Until then, owners and investors are going to be keeping an eye on rates.

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