Views

Many hotels will only return to 2019 free cashflow levels beyond 2023 yet there is a buoyant mood in the segment with many owners and operators hoping and expecting a strong bounce back in 2022.

Hospitality debt structures in SSA

Debt markets

The Covid-19 pandemic has triggered falls in the values of investment-grade hotel assets and portfolios in Sub-Saharan Africa (‘SSA’). The social and economic impact the pandemic has had on countries in SSA has been greater than that experienced during the Global Financial Crisis (‘GFC’). At an international level, the likes of the G-20 have announced the suspension of debt repayments to assist African countries during the crisis. Africa has unfortunately had little benefit from government assistance programs, with financial strain having led to an abrupt decline in commodity prices and large foreign financial outflows coupled with economic lockdowns. This activity throughout 2020 and into 2021 presented some challenges on the African continent with its relatively underdeveloped private capital markets sector. Governments throughout SSA have launched various measures since to counter reduced tax revenues due to lower tax base as many have lost jobs or gone on furlough; as well as tried to reduce the surge in borrowings to keep businesses afloat. Albeit most countries in SSA are in a low interest rate cycle, many are still struggling to meet debt obligations due to the slow recovery which has affected the hospitality industry significantly.

Types of funding

As we come to grips with the pandemic, most commercial banks and Development Funding Institutions (‘DFI’) still face two main challenges in terms of financing needs for hotel owners and investors. This would be the requirement of short-term working capital loans, the refinancing of existing long-term debt and the impact on balance sheet and the income statement once the moratorium on these restructured facilities mature. Both loan restructures are most often secured by increasing existing bonds on trading hotels which in turn places further pressure on Loan-To-Value (‘LTV’), Debt Service Cover (‘DSC’) and Interest Cover (‘IC’) obligations. This can be attributed to a combination of higher debt quantum and lower asset market value, which requires pushing tenure of debt facilities to a longer term. (Figure 1.) Larger borrowings to finance various measures to remain operational also increases the rollover risk in debt, with banks expecting clients to restructure and prolong the overall maturity date of these restructured loans.

Source: JLL Research 2022

Acquisition finance

The last 24 months has seen expected hospitality asset pricing reduce between 25% to35% as compared to valuations achieved at the end of 2019. This variance in the bid and ask price is dependent on location and asset type. Owners have tried mitigating this risk by offering 12 to 24-month income guarantees which are initially welcomed by investors, only to encounter challenges to raise debt by financial institutions. Owners with low to reasonable debt obligations have taken a view to ride out this period instead of disposing at what is seen to be discounted levels.

Alternative assistance is provided for the takeover of existing debt or vendor finance which is welcomed by incoming investors due to the lack of available credit. Sentiment in the hospitality industry remains a challenge for financial institutions, making it difficult to invest in the sector regardless of mechanisms such as short-term guarantees or loan moratoriums. This will improve in the short to medium with a clear recovery timeline and with vaccine rollout plans gaining momentum in SSA.

Innovative finance deals may provide a way for institutions to support the hospitality sector with a strong partner in times where many are retracting from the sector.

There has been a shift in the third and fourth quarter of 2021 where financial institutions have favored financing an incoming investor if the balance sheet is stronger than that of the seller, and if the business is diversified in its approach to the hospitality sector. This combined with a strong ESG focus (which is becoming more prevalent in the region) could lead to long term partnerships as was announced by Kasada Capital Management and the International Finance Corporation. These innovative finance deals are a way for institutions to support the hospitality sector with a strong partner in times where many are retracting from the sector. The onset of Covid-19 in SSA has highlighted the need for strong asset management as cost control measures have been placed at the forefront the business. 

Development finance

There remained a sharp decline in 2021 for financing hotel developments as most look to acquiring distressed assets. The mismatch in acquisition bid price versus development cost has meant a shift towards acquiring assets. Long term fundamentals for development in SSA remain strong, with demand factors still a key factor when considering growth in the sector in SSA.

Conclusion

Many investors will utilise the resources available to restructure debt obligations to survive the current period in the pandemic. The outlook remains positive with vaccine rollouts gaining momentum in SSA. Owners and financial institutions understand the value metrics impacting pricing of assets and the large gap in the ask and bid price when disposing. Owners and lenders will look to defer disposal of assets by recapitalising the balance sheet. With these increased debt obligations, many hotels will only return to 2019 free cashflow levels beyond 2023. We still see the lagging effects of the pandemic, but there is buoyant mood in the segment with many owners and operators hoping and expecting a strong bounce back in 2022.