Navigating the Financial Challenges for 2020
It’s great to see the level of enthusiasm sweeping the hotel industry over the past month, as hotel owners are busy preparing to re-open from the 29th of June. Operations staff are focused on making sure that their customers have a safe and enjoyable stay, whilst allowing them access to as many of the amenities on offer. The sales & marketing departments are informing potential guests of the re-opening offers, sending messages of re-assurance to those with concerns and basically, utilising all their experience, connections and know-how to drum up as much business as possible.
At present, the result of all this hard work is mixed. With most hotels reporting that occupancy levels for July and August are currently running at 50%, coupled with the hope that this forecast will increase, as a result of the perceived pent up demand in the staycation market.
In summary, while the general hope in the industry is that the remaining summer months will be positive; the truth is a little less optimistic. At present, booking levels are not reflective of this optimism. There needs to be significant pick up in the coming weeks for this to happen.
Accessing Supports to Re-open
The re-focus now is on what supports can help getting the doors open for the 29th June or shortly thereafter. There has been a significant demand for the Re-opening Grant, available through the local authorities. As you know, this provides a grant of between €2,000 and €10,000. Further, almost all operations are also accessing the Wage Subsidy Scheme, which is available up to the end of August.
Of course, prior to re-opening, there was a strong demand for the LEO Business Continuity Voucher and The Trading On-Line Vouchers.
In order to reduce the level of cash calls, the focus has been on securing moratoriums on bank loans for up to 6 months and warehousing tax obligations with Revenue – which is available for 12 months.
Moreover, there is a range of different options being explored to fund working capital as the doors swing open again. From temporary overdraft increases to more long-term facilities – such as the SBCI Covid-19 Working Capital Loan or the Future Growth Loan Scheme.
What Happens Post Summer?
Let’s agree there is a lot of enthusiasm in the sector and hard work being done to re-open on the 29th of June. Hoteliers thoughts must now move to what happens in September. How will they fund themselves through the slower months, without the traditional summer fat?
What happens when the demand for the staycation goes? And everyone returns to the ‘new normal’ of work, school and college; what markets are available for hotels and how strong will they be?
Corporate travel and conferences are not expected to return in real term until Q2, 2021. International travel will be at greatly reduced levels throughout this time – even as we open the ‘airbridges’. The numbers of weddings and functions are continuing to be curtailed with some uncertainty as to how these events can be run – for now, gone are the day of the good olde country wedding! Many hotels will see a significant reduction in turnover until the summer of 2021. This poses the difficult question of how to fund the business during the shoulder months of September to March.
Any surplus cash built up in a re-open spike (if it happens) will in all likelihood quickly run out!
How do you get through the leaner period?
I have no doubt this question will cause many hoteliers sleepless nights during September and subsequent months. In truth this issue probably needs to be addressed earlier!
Inevitability there will be a level of legacy debt post the summer trading period such as creditor debt, revenue debt, existing bank debt and potentially new debt drawn down to re-open the premises. How and when all of this gets repaid poses a particularly new challenge in the very immediate future.
Business owners should consider, there are ways of restructuring the business balance sheet; to right size your debt to a level that can be serviced by the expected cashflows over the coming years:
- Voluntary agreement: You can enter into agreements with your bank and creditors to reach long term solutions. This is obviously dependant on the creditors being open and amenable to this approach. To achieve this, the creditors will need to be satisfied that the cashflows that are projected will be capable of repaying them – albeit over a longer term.
- Liquidation: A business is placed into liquidation when there is insufficient cash to pay creditors as they fall due and is effectively wound down and closed. The liquidator will try and maximise the return for the creditors from the assets of the business. No doubt this is a position that many businesses that were thriving pre-Covid-19 would want to avoid.
- Examinership: This is a process whereby a business seeks court protection to restructure its balance sheet and reach agreement with its creditors on a write down of its debts. This process will ultimately benefit businesses that are viable in the long term. However, for any examinership to be successful it generally needs a fresh injection of equity and this investment needs to be available within a short period of time for the business to successfully exit examinership. There is also a risk of losing control of the business through this process.
- Government Supports: The Government may roll out a new set of supports for the industry if the crisis deepens as many industry analysts expect in September. However, this may depend on the overall economy’s response to the crisis. And the ability and the call on the Government to provide funding to all sectors – not just the hotel sector.
- Lease Options: Hotel owners may consider a long-term lease of their hotel to an operator. This would effectively mean they can step away from the day-to-day operations and depending on the strength of the covenant – receive a guaranteed long-term income on the asset. This income may then be used to reach an agreement with creditors, retain the ownership of the hotel – albeit not the operation. But, ultimately secure their future with the asset.
It is inevitable when the bustle of the summer season ends and as the dark, colder autumn nights approach, office lights will be burning brightly into the night as hotel owners try and navigate the financial challenges of surviving this shoulder/off season post Covid-19. And be warned, this may be more difficult if the summer months of July and August do not produce the occupancy levels and surplus cash that everyone in the industry is striving to achieve.
Author: Derek Lowry, Investor Relations, Invite Resorts