Bangalore/New Delhi: Indian hospitality companies are trying out various ways to pare debt, mostly holding up expansion plans this year, after some firms had to restructure loans.
In the past year, a slew of firms such as Royal Orchid Hotels Ltd, Hotel Leela Venture Ltd, Kamat Hotels India Ltd and Neesa Leisure Ltd opted for corporate debt restructuring (CDR).
Bangalore-based Royal Orchid Hotels is the latest to have applied for CDR after its board of directors in January agreed to a debt restructuring.
The company is also planning to divest a hotel to reduce debt this year, which stands at Rs.150 crore, chairman and managing director Chander Baljee said.
“In 2013-14, we are looking at consolidation, and expansion would only be in the form of taking up new hotels on management contracts, in which there is zero capital required,” Baljee said in an interview. “Once the scheme is approved, you get a breather, and the debt repayment schedule gets an extension.”
Even when the hospitality industry underwent a slowdown in the past two years, many hospitality firms went for expansions. Project costs overran, primarily due to delays, but hotel companies still invested in opening new properties, causing a setback for many due to lower demand.
Subrata Ray, senior group vice-president at credit rating company Icra Ltd, said the slowdown resulted in lower internal accruals and cost escalation of projects, creating a funding gap.
“These hotels companies need additional funding but they are not able to get fresh loans from banks because of the existing debt. That’s the reason why many hotel companies are going for debt restructuring. In a good economy, the cost escalation in projects could have been handled easily, but a bad economy has made it into a burden,” said Ray.
Last September, Kamat Hotels was admitted under the CDR mechanism and this January, the salient feature of the final CDR package was discussed, where the mandates from a few lenders were received and other lenders were asked to submit their mandates soon.
Kurien Chandy, chief financial officer of Kamat Hotels, said in an email response that in the next 10 years, the company will be debt-free and cash-rich.
“We are in the process of selling the surplus assets and will generate cash flow, which will help in reducing the debt by more than 50%. Promoters will infuse the funds by selling their personal assets over the period to reduce the debt further,” said Chandy, adding that the focus is on hotel operations to generate cash flows to make the company debt-free.
Hotel Leela Venture applied for CDR for a debt of Rs.4,300 crore in February. In September last year, the company held a meeting with its lenders and the CDR package was approved. Hotel Leela was told to repay all its outstanding principal amount in eight years from January 2014. It also has to pool in all its hotel properties (other than its Bangalore hotel) as security against the loan amount from the CDR lenders.
“Many of the big hotel companies have gone for restructuring the debt, because there is a mismatch in cash inflow and debt repayment scheme,” said Vivek Nair, vice-chairman and managing director of Hotel Leela Venture.
Nair said the corporate debt restructuring process is in place for the company and it is following the process as per the requirement of the package. “It will help if the infrastructure status is granted to the hotel industry and hotels are included in infrastructure lending list of RBI (Reserve Bank of India). It will enable us to pay our debts over a period of 15 years,” he said.
Gujarat-based Neesa Leisure, which owns and operates hotels and resorts, also applied for CDR package last year. Managing director Manoj Singhal said the scheme has been approved and the company is in the process of signing a master restructuring agreement with its lenders.
The challenges for hotels remain cost escalation and insufficient internal funding and analysts expect there will be a funding gap in the short-term.
Hotels have to raise funds through equity or debt, and while equity is not easily available, debt funding is a challenge because of existing loans.
“Many of these hotels are looking for restructuring of debt, with the change in tenure for repayment of loans over a longer period of time and some addition debt funding,” Ray of Icra said.
Analysts tracking the sector said 2013-14 will see a number of hotel assets being acquired by a handful of cash-rich hospitality companies or wealthy individuals.
More hospitality firms may go through the same CDR path, primarily because most of them will find it difficult to meet debt requirements, according to Akshay Kulkarni, regional director, hospitality, South and South-East Asia, at property advisory Cushman and Wakefield Inc.
“Some brands will collapse and be taken over by others. We will also see a lot of deals where hotels will be bought over by some companies who have the capital,” said Kulkarni.
Last April, Royal Orchid Hotels sold a hotel in Ahmedabad to Gurgaon-based investment firm Samhi Hotels Pvt. Ltd for Rs.67 crore as a part of a debt-reduction plan. Samhi also bought another incomplete hotel in Bangalore last year, which it plans to finish and launch this year, said Ashish Jakhanwala, managing director and chief executive officer of the Gurgaon-based hospitality start-up.
“We have a healthy pipeline of two-three (acquisition) deals to crack this year but there is a gap between fair value pricing linked to income-generating and what sellers are expecting,” said Jakhanwala. “It would be wrong to say that the hospitality business has failed, because it’s largely a corporate failure where companies over-built and went on massive expansion, built upscale hotels in suburban areas and didn’t structure their capital in the right manner.”