Hotel Industry Crisis: Key points to consider by a lender/borrower
As the COVID-19 crisis has grown in the world outside China, the travel and tourism industry is the hardest hit of all other sectors. During the last 100+ days, many hotels have just maintained single-digit occupancy and relatively much lower ARRs. As a result, many hotels don’t have the cash flows to keep their doors open. The major companies are taking the furlough route for their employees and many properties are looking at closure. This is the time for these troubled assets to go back to the basics. Here is a list of time-tested Dos and Don’ts for distressed assets:
1. Prevention: Prevention is the first step towards troubled hotel loans. Prevention includes careful underwriting of the collateral and the borrower. In underwriting the borrower, the lender should look to the credit report, financial statements but should also go beyond them to get a better understanding of the borrower’s reputation, character, fortitude, etc.
2. Monitoring and early warning: Information control is paramount. Careful monitoring of the loans until they are paid off is very important. The entire information should be gathered and stored in one place in an organized manner to ensure continuous monitoring of the loan book. Early warning systems should be established to the problems with the borrower/collateral or the project’s feasibility.
3. Comprehensive Situation Analysis: The Special Asset Group (SAG) should gather, analyze and summarise all relevant information on the loan, the borrower, the collateral and relevant documentation and update the borrower’s financial statements, ta returns, litigation history, and credit rating. In addition to loan documents, evidence of advances, guaranties, notices, and other notes should be prepared to have a complete history of the ongoing loan.
4. Evaluate the information and alternatives: Evaluation of all gathered information by legal and business experts. Fully aware of the situation, the lender will be able to access if he should do nothing, restructure the loan, seek a receiver, initiate foreclosure, or initiate involuntary bankruptcy proceedings.
5. Pre-workout agreements: Before commencing workout negotiations, a pre-workout agreement should be executed. Such an agreement offers the advantage of protecting the lender from the liability from claims arising from the workout process itself. Whatever the cause of the problem is, the financial institutions always find themselves the victim of claims that oral agreements, representations, or waivers are made in a course of a workout entitles the borrower to rights never contemplated by the lender upon entering workout negotiations.
6. Document the transaction only: Once the negotiations end either in restructuring or workout, all aspects of the agreements should be thoroughly and fully documented immediately.
7. Develop a game plan & stick to it: Once the alternate plan of action has been selected, the lender should develop a blueprint for executing its course of action. Any delay post the selection of a future course of action is ill-advised. The most successful lenders are those who stick to their plans except for any changed circumstances.