Managing cash burn: Finances

Hoteliers must look at every detail of the business plan to protect capital during the ongoing COVID-19 crisis. On Thursday, HOTELS presented an article more focused on operational considerations. Today, we look at the central cash burn concern of finance.

Before going back to lenders, make sure you’ve done the cash flow basics: drawn down on all existing credit facilities; optimally allocated cash reserves; sought grace periods for payment of real estate taxes and labor taxes; requested the maximum extension for CARES repayments; evaluated and participated in any local, statement or national stimulus/loan programs (including CARES, SBA and Main Street Lending Program and  other initiatives around the world) that make sense given your cash position and business outlook, have workable loan deferments or refinancing in place and have a detailed business plan for how you will manage through the term of the loan (forensic performance and historic on-time payment records are a big plus here).

By Contributing Editor Mary Scoviak

Continuing to work with lenders or other parties to cover the liquidity gap is a given. AHLA estimates 91% of U.S. hoteliers sought relief from lenders. Eighty-six percent of them got deferrals of 90 days or less—which means half of those payments will have to made in July. So how will they pay debt service with dwindling cash reserves and occupancy at 0-20%? “They can’t,” says Matthew Arrants, executive vice president, Pinnacle Advisory Group, Boston, Massachusetts. “They’re going to have to look at changing their entire capital stack—maybe by restructuring or bringing in additional sources of equity.”

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Getty Images

As in any market, big players with deep pockets will get the best second-round terms. But smaller players have cash management options. “Investors need to focus on minimizing borrowing costs and reviewing interest rates swap strategies to benefit from reduced interest rates,” says Dave Baswal, CFO, Ovolo Group, Hong Kong. “I do think there will be another round of deferments, but the cost of borrowing will start coming under pressure if a long deferral is needed.” Submitting several detailed scenarios is a major plus in convincing lenders there are workable plans in place to deal with uncertainty.

Governments can’t go on helping out forever, either. The PPP, SBA, and Main Street loans have been helpful. But the final terms on these programs are still in progress,” says Daniel Fay, founder and chairman, Commonwealth Hotels, Covington, Kentucky. The hotel industry continues to press for changes in the Main Street Lending Program to modulate its rigid EBITDA leverage test and also to make the CMBS market more amenable to working with hotel borrowers (AHLA estimates that 91% of hoteliers who borrowed from banks got forbearance, deferral or other relief, while only 20% of CMBS borrowers got the same relief). But it’s a question as to whether hoteliers can cash in before their cash runs out.

Davy Parsons, senior manager, BKD CPAs & Advisors, Nashville, Tennessee, sees some interesting strategies for hoteliers willing to think outside the box. “If you’re having trouble with a big bank, be proactive in looking for other sources,” he says. “Private equity and boutique capital firms see substantial opportunity in the hotel market right now. They know the difference between a company that’s performing poorly because of COVID-19 and one that’s simply mismanaged. The terms shouldn’t be so bad that you can’t get to the other side. If you have good financials over the last three years, smart investors will want a piece of that. You have leverage. Be leery of those trying to capitalize in short term.”

Minority investors may be another option for easing the cash crunch. James Berkeley, managing director, Ellice Consulting, London, sees some new alternatives coming out of Asia and Europe. “We’re not talking about the traditional hedge fund model that requires you to give up so much control in the decision-making for your business,” he says.  Instead, these new investors are often family-led conglomerates that specialized in other sectors and need the liquidity of businesses like hotels. “Companies such as Hospes, Madrid, and Gaw Capital Partners, Hong Kong, come in as a partner and create value by swapping debt for equity. This approach can be almost like an assessment management workout that allows for volatility for the new investor but still provides downside risk protection.”