
Industry Report
Restructuring Hotel debt – distress and de-stress
Hotels and hotel owners in India have been impacted by disruptions to operations and demand, arising from the Covid pandemic. Hotels are capital intensive; substantial supply addition in the last 5 years means that the debt burden is sizeable and debt service is challenged.
This report by Horwath HTL India highlights restructuring challenges, and possibilities for owner, lenders and potential investors or buyers of assets. Valuation gaps can have varied depth, depending upon the extent of distress or a goal of de-stress. Careful strategic evaluation can help create operational, financial and investment value.
Current State of the Hotel Industry
The pandemic has caused severe disruptions in the hotel sector, with prolonged shutdowns, travel restrictions, and reduced demand. Leisure destinations have performed better than city hotels, which make up about 80% of the supply. The relief packages announced have largely bypassed the hospitality industry, emphasizing the need for recognition of hotels as essential infrastructure for the nation’s economy.
The Importance of Hotels
Hotels are vital for hosting business and political leaders, supporting tourism, and contributing to the economy through job creation, foreign exchange earnings, and GST contributions. They are not just places to stay but are integral to the infrastructure supporting economic and political activities.
Challenges Faced by Hotels
Hotels are capital-intensive and highly perishable assets. Each unsold room night represents a lost opportunity that cannot be recovered. Despite some operational profits, many hotels struggle with debt service due to marginal or negative EBITDA. Regulatory restrictions have delayed the calling of defaults, but many hotels remain on the brink of financial distress.
Distress and De-Stress
The industry faces two scenarios: distress and de-stress. Distress is the current condition of many hotels, while de-stress represents the potential for recovery. Timely intervention can prevent distress from deepening. Lenders, investors, and regulators must recognize the value of the industry and provide support to facilitate recovery.
Strategies for Debt Restructuring
Restructuring Debt with Lenders:
- Ideal for long-term viability, this involves creating practical repayment schedules and realistic interest rates based on the asset’s debt-carrying capacity. This may include changes in branding and management to align with market demands.
Asset or Equity Sale:
- Selling assets or equity can provide immediate financial relief. It’s crucial to distinguish between distressed assets and distressed owners. Distressed assets have diminished value due to competition or poor management, while distressed owners are over-leveraged. Buyers should look for deals that offer value gains rather than the deepest discounts.
Operational and Financial Correctives:
- Swift and comprehensive operational adjustments are necessary. Financial distress often involves issues of ownership and control, requiring clear and unemotional assessment. Motivated advice and emotional attachment can hinder effective restructuring.
The hotel industry requires strategic planning and support to navigate through the pandemic’s impact. Recognizing hotels as essential infrastructure and facilitating debt restructuring are critical steps. The industry must balance immediate financial relief with long-term sustainability to emerge stronger from the crisis.
Download the report
For detailed charts, graphs, and further analysis, download the full report here