Hospitality bumps: Why Indian hotels are doing poorly & bankers looking to recover loans

The Mark Hotel in New York City has luxury down to an art. A 4,788-square feet penthouse with a ginormous terrace, five bedrooms equipped with the finest Italian linen and 24/7 access to luxury hairstyling and tailoring — the ‘Mark Five’ is a triumph of hospitality.

Of course, a day’s at one of the world’s most exclusive hotels comes with an attached bill of $86,000, plus taxes. India, though, does it much cheaper. After all, the Narendra Modi government’s favors tourism-driven jobs creation. But though unburdened by The Mark’s price tag, Indian hotels are doing poorly, with stressed loans have jumped 63% in the past three years.

The gross stressed loan value is estimated at Rs 11,000 crore, which is 27% of the total lending exposure of Rs 40,500 crore, as on March 2018, according to data by Prognosis Global Consulting, a hotels consulting firm. The past decade’s excesses have caught up with hoteliers — with a pileup of thousands of crores of loan defaults.

Bankers remain stoic in their refusal and credit flows, tepid. Outstanding exposure to the hotel and tourism sector has declined 3% on-year to Rs 365 billion at end of March 2018, according to RBI data. State Bank of India deputy managing director Pallav Mohapatra sums it up. “We have done away with large ticket-size exposure in this sector. We are not taking any fresh exposure either.”

THE CRACKS 

Hotels are finding it tough to get out of the rut — real estate is exorbitantly priced, capacity is in excess and room rentals are down. More than a quarter of all loans to the hotel industry are turning sour. Be it 5-star chain Hotel Leelaventure being on the brink of ceding control to JM Financials Asset Reconstruction; The Trident, Hyderabad owner Golden Jubilee Hotels group being in receivership or ITC taking over Park Hyatt, Goa — the grim story doesn’t change.

Vivek Nair, CMD, Leela Hotels, and Resorts, says, “We are confident that one of these funds (Blackrock, SSG Capital Management, RB Capital and an as yet unknown New York-based fund) will partner to restructure the loans.”

Explaining the trouble, he adds, “The stringent norms adopted by banks for the hotel’s sector — in particular, the very short repayment period — have led to this crisis. It could have been resolved if norms of infrastructure funds set by the finance ministry in October 2013 and the RBI notification of November 2013 were applicable even for present loans.” He believes mammoth 200-plus hotels have become non-performing assets (NPAs) as they have not been able to repay loans within four to five years.

V Srinivasan, deputy managing director, Axis Bank, concurs. “The key thing in financing hotels is that you need long-dated financing with cash flow sweeps — if there is more cash flow projected, you should sweep it and get the debt repaid,” he says. The mistake banks made was to keep the tenure of debt on hotels too short at five to seven years, instead of 10-12 years. “Loans were available for 10 years, which meant that entry of the project had to be magically timed right! We all know that no one can time the market,” says Saurabh Gupta, managing partner, investment advisory & asset management, Hotelivate.

Overzealous development, inflated project costs, high-interest rate and crossmortgaging of assets pushed NPA levels. During 2005-15, the number of hotels added was more than demand requisite, affecting revenues and business. SP Jain, managing director, Pride Hotels, says, “New guidelines keep coming up, making it difficult to get licenses, which, in turn, delays projects.”

Pride got its loan book of Rs 200 crore cleared by HDFC Bank in 2017 and is now adding rooms with an infusion of Rs 400 crore. “There exists a significant gap between hotels capacity to generate sufficient cash flows and debt service liabilities. Hence, the rising NPAs. RBI’s tightened provisioning and NPA classification norms have also resulted in a higher instance of NPAs,” says Siddharth Thaker, managing partner, Prognosis Global Consulting.

FINE PRINT

Since the peak in fiscal 2007, hotel average room rates (ARR) in India dropped by approximately 40% and EBITDA margins deteriorated 12-14%, as per Prognosis data. Cash flow is definitely not as per debt accumulated on the books because of the fall in occupancy rates and competitive pricing. A lot of accounts have been resolved by sales to asset reconstruction companies or by entering into one-time settlement schemes.

A senior official whose bank has a large exposure to hotel loans explains, “When things went bad, we obviously turned cautious towards the sector, but what gave us comfort was the fact that these loans were backed by hard real estate assets. Even right now, the stress is visible due to low occupancy and room rates, which don’t meet the rate of return. So we are staying away from promoters who can’t put skin in the game when things turn bad.”

Cost overruns are the highest among internationally-branded, full-service hotels positioned between luxury and upscale in tier I-II markets. In such markets, hoteliers have not been able to command ARR over Rs 6,000, rendering business unfeasible.

“With such a mismatch of product and pricing, hotels are bound to run into financial trouble,” a senior official from a Mumbai-based hotel points out. While occupancies have improved over the past 12-18 months, rates and profit margins remain under pressure. Overleveraging, excess capacity and buying land at unrealistic values are still prevalent, adds Thaker of Prognosis. Yes, Bank, ICICI Bank, and Axis Bank have the maximum exposure to hotels.

OPENING DOORS AGAIN

The cosmetics around hotel debt have been peeled away now. Bad loans can no longer be infinitely prolonged under corporate debt restructuring or strategic debt restructuring, which had abysmally low-resolution rates. There is a clear escalation matrix, where such loans get classified as NPAs and go towards resolution. “It makes sense for hotel owners sitting with NPAs to recognize the changed landscape and that the sharply reduced equity value may still be the best option before them,” says Gupta of Hotelivate. “Once the matter reaches NCLT, it may be too late for the owner to press the damage control button.

If the bank and owners are not ready to take this haircut themselves, they are just offering the scissors to resolution professional or committee of creditors.” In the medium term, hotels are still expected to underperform as an asset class, especially at current levels of leverage. Many global funds and institutional investors are re-evaluating their real estate portfolio strategy for emerging markets. Stressed hotel operators will be forced to consider sale or consolidation through mergers, says Thaker.

A new proposal to reinstate infrastructure status to hotels and reduce threshold limit to Rs 50 crore, from Rs 2,800 crore, is in the works. Nair says the fillip is imperative if the government is serious about an addition of 180,000 rooms. Otherwise, the aim to double foreign tourist inflow from the present 10 million by 2020 would not be possible.

Source:-https://economictimes.indiatimes.com/industry/services/hotels-/-restaurants/hospitality-bumps-why-indian-hotels-are-doing-poorly-bankers-looking-to-recover-loans/articleshow/64642251.cms?from=mdr

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