Sunday 21 January 2018

Battling on as the tough times check in on unwanted guest list

Collapse in property values and three years of brutal trading have left many hotels reeling

A LOOK of confusion crosses her face, before the answer comes back as a resounding 'no'. No, one of Ireland's top hotels will not hold the deposit for my best friend's wedding in an escrow account.

And one of Ireland's top hotels is looking suitably miffed that anyone had the nerve to even suggest such a thing.

Last week, though, the cautiously minded were given yet another reason to be wary of imparting a large cheque to a hotel.

In an apocryphal style they could surely trademark, the Irish Hotels Federation (IHF) warned that Bank of Scotland (Ireland)'s withdrawal could have dire consequences for its industry.

Nearly 150 hotels rely on BOSI for "vital" working capital to "carry them through the quieter winter period", the hotels' lobby group pointed out in a statement.

"Unilateral withdrawal of those working capital facilities at the end of December would be catastrophic," IHF president Paul Gallagher warned, appealing to the Government to intervene.

The underlying thrust of the IHF's message was simple -- collapsing property values and three brutal years of trading have turned hotels into the pariahs of SME banking land.

Many of the 150 soon-to-be jettisoned by BOSI stand slim chance of securing new arrangements elsewhere, and will effectively be hung out to dry unless a saviour steps up to the plate.

Cash-flow problems

Coming just weeks after a consultants' report from Horwarth Bastow Charleton (HBC) found that a third of hotels were experiencing "severe cash-flow problems" at the end of 2009, the warning had added weight.

"I think hotels probably are the most difficult sector we deal with," admits one seasoned SME banker. "Applications by hotels don't get treated differently, there's no red flag that goes up. . . but hotels have been seriously on our radar for two or three years now."

Banking sources say hotels came on to their radars largely at the behest of the IHF who strongly championed their members' causes and arranged high-level meetings between bankers and tourism chiefs and even tourism ministers.

Most banks now have dedicated hotel specialists who actively monitor the progress of the sector, and several recommend consultants who can tweak hotel business into shape.

But despite attempts by the banks to keep hotels back from the brink, stories of failures abound. Almost 120 leisure businesses have slumped into insolvency in the first seven months of the year, with hotels the biggest contributor.

Many of these 120 concerns have simply closed, going down the liquidation route and divvying up the spoils amongst creditors.

One is in examinership, a court-led process where creditors agree to take writedowns on their loans so a business can keep trading. The rest fall into the controversial receivership category, where a bank slams down its trump card and seizes control of a hotel that is in breach of its loan agreements.

About 30 hotels are in receivership today, triggering outrage from the IHF, which says the seized hotels are distorting the market by offering rock-bottom prices effectively subsidised by the banks.

"You'd have to have no options left before you'd go for a receivership," says one experienced banker.

"If you have a very big hotel that's not operating for a particular location, a receivership is an easy thing to do. . . but what's going to happen then? There's a very significant cost factor and does it add any value?"

Concert promoter Denis Desmond is apparently interested in taking Citywest off BOSI's hands -- but so far none of the receivership hotels have been offloaded and the banks' exit strategies remain a great unknown.

"We're not seeing any requests to fund hotel purchases," says one banker. "Really there's no active market out there at this point."

The lack of an active market hasn't prevented interest from abroad, with banks reporting a "lot of inquiries" from international operators "interested in buying blue-chip hotels in cities".

"There are people out there who think the Irish market has hit the bottom," says one banker, referring to the would-be investors as "vulture funds".

The feeling that things have bottomed out is borne out by frontline experiences of the banks themselves. Having struggled through a horrendous 2008 and 2009, one bank says 30 to 40pc of its hotels are at "breakeven or better".

"Some traditional family-run hotels that stuck to a single property are surviving well now," says one banking source. "They've faced increased competition and their return per room went down, but they dealt with that by cutting costs."

The flip side is that those hotels that upped their game are raising the bar for the rest. One bank says that while it would certainly talk to BOSI's jilted hoteliers, the businesses will need a good trading story to tell if they were to get the nod for new accounts.

"They've had two appalling years, they should have reorganised themselves to come out of this year reasonably well," says one banker. "There's been a lot of positive factors in 2010 as well, more people are holidaying at home, more visitors from the North are coming down after the currencies turned.

"Hotels should be able to show they've taken advantage of all those positives."

While responsive hotels are apparently seeing better trading this year, the medium-term outlook for the sector looks grim.

Addressing analysts yesterday, insurance firm FBD holdings boss Andrew Langford revealed the reasons behind a 45pc cut in the carrying value of the group's four Irish hotels.

"Valuers are more pessimistic as to when the Irish hotel industry full stop is going to get back to a normal state," he said flatly.

Bankers warn, too, that while day-to-day trading should be getting better, another major storm is brewing for Ireland's hotels.

"Interest rate risk is a big thing," says one banker. "We're near the bottom of the cycle now, they're going to go up at some point and hotels need to be conscious of covering that and maybe fixing debt."

While common perception puts debt as an issue for the tax-driven mega hotels thrown up in the boom, the reality is that many family-owned hotels also racked up significant debt by investing in extensions and leisure facilities.

The indebtedness of the sector is glaringly obvious from the recent HBC report, which showed average hotel debt stood at €6.4m at the end of last year.

With many of those loans taken out at bargain basement interest rates, and banks already indicating plans to extend their interest rate 'reviews' from mortgages into SME lending, repayment hikes could pack quite a punch.

And against that backdrop, even the finest of hotels may well have to brace themselves for dealing with escrow requests from punters other than pesky business journalists.

Irish Independent

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