Chris Smith, partner and co-head of the Debt Advisory team, presented at the recent Henry Stewart conference on raising finance for hotel investment and development, attended by operators, investors, funders and advisors. Chris and Paddy Bamford, director of Real Estate, provide their thoughts on the key themes of the conference below.
Amidst signs of economic recovery, the hotel industry has seen trade stabilising and debt funders loosening the purse strings for the industry. With a 25% drop in hospitality and leisure administrations, to 107 companies in the January to September period of 2013, compared to the same period last year, now could be the right time to invest.
During the credit crunch, banks withdrew from new lending, due to the level of discretionary spending in the sector and their own balance sheet concentration levels from the boom years. This withdrawal left a gap in the market for alternative funders to enter, although usually at a higher cost to bank funding. The result has been a shift towards a more diverse funding market, with a greater proportion provided by insurance companies, wealth funds, pension funds, mezzanine funds and debt funds for the UK hospitality industry.
Banking activity has picked up again in recent months, but this has mainly been restructurings, capital expenditure and extensions to existing facilities, rather than new capital. This is driven by the restructuring of balance sheets and new regulation.
For those looking to enter the market or develop their offering, it is currently cheaper in most parts of the UK to buy an existing hotel and undertake the required capex to redevelop it, rather than build a new one. For lenders it also gives them a safer proposition, with at least some trading to diligence rather than none.
The process of raising funds, either debt or equity, has now become relatively agonising for most operators. It’s now not uncommon for it to take well over a year to complete. It is burdensome and businesses have to be careful how they manage this process so key management do not take their eye away from actually running the business.
Lenders are now very focussed on making sure their goals are aligned with investors and management. They will want to see a real financial commitment from both as a result with the focus on debt repayment ahead of any profit distribution.
Management teams will need to prepare a detailed business plan – setting out all the key aspects of their business. This has to be in depth e.g. providing a breakdown of the revenue mix by customer type and the impact market influences have on each type; customer expectations of facilities and services, how that is expected to evolve and what impact that may have on capex assumptions. Funders will also be interested in future investment and the expected impact on the top line, cash flow and cost control within the business. They will want to understand robustness of earnings, positioning in the market, core values and competition. A brand can add value to a funders’ outlook on a business and could act to alleviate some perceptions of risk. Thought should be taken of market intelligence reports, with business plans including trends, pipeline and supply commentary.
Surrounding yourself with experienced people is the way to a successful fund raising process. It is a complicated and time consuming process, which therefore needs specific resource dedicated to it; whether that is internal or hired consultants. Above all, preparation is key!