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Summer swoon: Are we out of the woods yet?

Summer swoon: Are we out of the woods yet?

Wake-up call! Even though we have seen a version of this movie before and know how it ends, it is not quite over yet. 
 
The recent extreme volatility in world markets reminds us that the massive deleveraging of credit markets has not yet fully occurred. It seems that all capital market participants gorged at the cheap, abundant debt trough of the early 21st century, and we still have a long way to go to reduce overall debt burdens: domestic and foreign deficits, consumer and corporate credit, residential and commercial real estate loans.

Large federal deficits are hampering governments’ ability to influence economic and monetary policy. Spending cannot be easily expected to fuel GDP. Though consumer savings seems to be increasing, overall debt loads and new job creation remain somewhat stagnant.  

While inexpensive cost of capital, both equity and debt, continue to be everyone’s best friend, maturity dates are piling up and will need to be taken out by some new form of capital. In many cases, new equity will still be required to replace previously over-leveraged debt, which will naturally drive the cost of financing to increase. Should returns increase in a higher-risk environment, or will the yield-starved universe prevail?   Forbearance and extensions cannot continue indefinitely. Restructuring, austerity and paydowns are requisite at some point, eh?

The hotel business was on an optimistic trajectory in revenues, asset valuations, transaction activity and perhaps EBITDA (though the latter still lags). However, recently demand growth has flattened, and public lodging multiples have contracted significantly as profit growth expectations have moderated. The fledgling securitization market that we all were hoping would return as a capital source backed up quickly earlier this month.  

Fortunately, new supply is still largely constrained, and interest rates remain extremely low. We are going to need help to navigate some of the credit and economic headwinds that are still blowing.   

Is this just a typical summer swoon to be followed by a fall recovery as everyone gets back to work? Have you restructured your company and project capital requirements, or are you still hoping to grow out of trouble? Is it time to buy, sell or sit still?        

Please pass the popcorn.

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