The Covid pandemic was an unprecedented challenge for the entire global economy. The pandemic had an immediate and drastic impact across the global hospitality industry and its financing markets.
Contributed by J. Pedro Petiz, Avington Financial, London
This could have been even more severe than the 2008 financial crisis but for the immediate resolute action from government agencies, central banks and finance ministers, which permitted a pragmatic, dynamic approach to the situation by financial and non-traditional industry lenders alike.
The fear within the industry was that the pandemic would freeze debt and equity markets for extended periods, accelerate foreclosures, and impose ultra-restrictive lending guidelines for those few groups who were still prepared to lend.
Thankfully, that was not the case as there was only a brief period of shutdown (March to May 2020). Borrowers and lenders across the spectrum openly engaged with each other and established appropriate measures to navigate such unprecedented times, including grace periods, covenant waivers and maturity extensions for small or no penalties. In the meantime, borrowers were able to tap into governmental assistance programs, including furlough or paycheck protection programs, to keep staff on the payroll while minimizing cash outflows during the pandemic-induced lockdowns.
Bankruptcies and insolvencies were kept to a minimum and mostly limited to special situations where borrowers or assets were already in trouble before the pandemic.
As a result, in today’s almost post-COVID world, borrowers and lenders have strengthened their relationships and resolved to communicate and work together to solve issues, as opposed to falling back on original agreements and delegating legal teams to enforce their respective rights.
The abundance of liquidity in capital markets which already existed pre-pandemic has continued, further fueled by central banking liquidity injections. Today, the debt capital markets for the hospitality industry remain awash with capital ready to be deployed, and this situation is especially prevalent in the mezzanine financing markets.
Traditionally, the mezzanine financing markets for the hospitality industry have been controlled by traditional lenders and a handful of large alternative asset management groups with specialized debt teams. Since 2014/15, the market has seen the emergence of new players in the space, notably:
(i) single and multi-family offices who have adopted a direct ‘go-at-it alone’ strategy in the pursuit of their investment portfolio diversification; and
(ii) expanding debt teams within alternative asset management and private equity groups who have raised incredible amounts of capital for specialized debt funds on the back of record low interest rates.
The hospitality lending market remains ultra-competitive, but most traditional lenders have remained steadfast to their core strategy. Instead, mezzanine market lenders have opted to differentiate themselves to borrowers by providing packaged financing deals (senior + mezzanine, or mezzanine + warrants, or mezzanine + convertible pieces), flexibility of terms (low prepayment penalties, flexible guarantee requirements, PIK versus current interest payment, etc.) and an openness to work with alternative capital structures (financing sale and leaseback transactions, working with PACE financing loans, and other similar government assistance programs for clean energy, solar, etc.).
Borrowers have an unprecedented amount of flexibility and optionality when choosing their mezzanine financing partner and, although financial terms have a floor, several valuable terms are open to negotiation, which can improve project appetite and returns for entrepreneurial principals.
From a sector preference, coming out of the pandemic, lenders focused their balance sheet on new lending to high-performing assets such as resorts and extended-stay projects and portfolios. However, the success of vaccine rollouts and the return of the business travel and the meetings and events sector has finally enabled the return of performance to traditional urban hotels and big-box MICE properties. Lenders, of all types and across all elements of the capital structure, have been quick to adapt and are now meaningfully more open to new business in these sectors.
As a result, while we were cautious for most of 2021, we are confident when we say today that the financing market is fully open across all segments of the hospitality industry. This, of course, is tempered by the unfortunate hostilities in Ukraine which has caused some lenders to “hit the pause button” for certain European transactions pending sight of a path to a peaceful resolution.