box mechanism, which attempts to give an equity value to a deal before
completion by working
off an historical balance sheet, as a particular problem in slowing deals.
But he argued that the transaction market was close to an inflexion point. “Assets are starved of capital to reposition and banks can’t do it,” he said. Deals were in part taking longer as standards of due diligence are now set where they should be. “Deals done in 2006 to 2008 were done without due diligence,” said Taljaard. Adrian Turner, managing director of Crownway Capital Europe, said: “You always know you’re at the top of the real estate cycle when banks get big into hotels.” Turner contrasted Europe with the US with the latter seeing confidence coming back. “REITs are buying for increased yield. It is starting to change pricing in the US.” Parts of Europe were still scary,
said Turner. Ireland still had an intravenous drip in place from the European Central Bank. But the country has taken huge pain already: “If the rest of the world took on in the same way, the crisis would be over,” said Turner. Taljaard said that his firm had taken part in the Maybourne refinancing which had been led by a US mortgage REIT. “The talk about insurance companies filling [the debt finance] void has not happened,” said Taljaard, adding that for insurance companies to come in to the market it was necessary to synthetically solve the requirements they had in terms of the nature and shape of returns.
Bob Silk, relationship director
at Barclays Corporate, admitted that banks generally wanted a “bullet proof codpiece”. The big
fear
for buyers was
“catching
a falling knife” but Silk was confident we are near the bottom: “I’m fairly convinced that in five years we will look back and think ‘I can’t believe it was so cheap’.” Silk added that he expects to
be busy this year and was already discussing
“four big deals”.
Domestic UK lenders had worked out that they need to lend more money, he said. There won’t be a return to the “lunacy” of 2005 to 2007 but lending “will slowly but surely ease up”. Derek Gammage, head of hotels EMEA for CBRE, was sceptical that Asian buyers would feature heavily in the near future. “The premise of Asian buyers is that they are going to buy cheap,” he said but there were better opportunities nearer home. More likely buyers were Americans who had access to cheaper debt. More deals were likely to be done as “the stars were now aligned”: interest rate swaps had burnt off; debt was stretched and therefore motivated; equity was realistic; and banks had taken the impairment. Gammage said that banks were selling packages of debt and there would be pure hospitality debt trading.
“Consensual solutions
of three years ago are not so consensual today,” he added.
HA Perspective: Are we finally at the point where deals start in earnest? The short answer is no. But it seems highly likely that there will be more movement than we have seen for some time. At the outset of this crisis, Hotel Analyst divided the problem loans held by banks into three categories: basket cases, such as GuestInvest, which needed the plug pulling immediately;
fundamentally
sound businesses that had some issues with the capital structure, such as Mint; and profoundly
indebted companies that needed serious adjustments to their capital stack, of which De Vere Hotels was a case. In this context it made sense for the receivers to go in immediately at GuestInvest, which they did, and for the most robust companies to trade, which was the case for Mint. While the debt holders got out with their cash back in the Mint deal it was, and is, unlikely to be the case in many other deals. Robert Cook, CEO at De Vere, was also speaking at the Ernst & Young event. He said that his bankers Lloyds had been generous to him in terms of capex but “we are playing catch- up for the last three years”. Hugh Taylor, chief executive
at Michels & Taylor, said that in general it was hard to look at a capex programme that offered
a return. If you were
able to reposition and work in an extended or different market then there is an opportunity that makes good business sense. In this context, lenders who are in effective control of assets need to ask themselves whether they are the right people to oversee such a repositioning. Even if existing management can be incentivised to provide “cover”, debt is still taking on equity like risks. Given
that the margins for
lending on plain vanilla deals are at historic highs (despite what the lenders might try to tell you) it makes more sense to take a write- down on the bad deals to free up the balance sheet to lend on deals that are much less risky. It is a quirk of human nature
that losses are felt far more than gains. Now looks the time for banks to steel themselves for tough decisions.
Hotel Analyst
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