CHECKING IN? Why Distressed Debt Investors Should Look to the Hotel Industry - BY MORGAN C. FIANDER, ASSOCIATE, POLSINELLI
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
CHECKING IN?
Why Distressed Debt
Investors Should Look
to the Hotel Industry
BY MORGAN C. FIANDER, ASSOCIATE, POLSINELLI
Jan/Feb
2021
Journal of
Corporate
Renewal
22
T
he economic downturn in more private events? The answers
2020 has presented both to these questions, of course, rely
opportunities and challenges on whether the new administration
in the distressed debt investing imposes new travel restrictions or
industry. The multitude of defaults retains current constraints, and
and forbearances and the general whether state governments maintain
decrease in business for hotels should restrictions on visitors crossing state
catch the attention of distressed debt lines and what local sights and activities
buyers looking for new opportunities will be available to any travelers.
to expand their presence in the hotel
industry or get their first foothold. It is more likely that tourism and
personal travel will pick up again
The question is, of course, when to before corporate travel.1 Companies
make the jump. Given the extraordinary will be wary of asking or placing any
circumstances imposed by the semblance of pressure on employees
COVID-19 pandemic, investors naturally to start traveling before the pandemic
have new and different questions and is under control and a vaccine is
factors to consider when purchasing widely available, as is predicted for
distressed debt. When looking at spring to early summer of 2021.
the appropriate indicators, however, Individuals, however, are not likely
opportunities abound for investors to to keep themselves cooped up for
find and make successful purchases that long. The type and location of
despite—or perhaps, because of— hotels will be key: a resort-style setup
the current economic situation. with outdoor space is likely to fill up
before a small boutique hotel in a city
When Will Travel, center. For investors looking to see a
Hotel Stays Resume? quick return on an investment, these
Distressed debt investors, like any considerations will be more controlling
investor, are looking for the right than a property’s long-term potential.
opportunity to grow their investment.
It follows, then, that a key consideration In seeking a target investment, investors
right now is when the hotel industry’s should consider these factors first to
business will start to pick back up, an determine the type and location of
indicator of a return on any investment. property that secures the debt. Once the
first or second wave of tourism travel
To take it a step further, which sector occurs, it will become clear what these
of hotel bookings picks up first will be travelers are looking for and what they
an indicator of what’s to come. Will are comfortable with, giving investors
the industry see an uptick in family a leg up on properties that may still
vacations initially, or will corporate be underwater but are going to be the
travel get back on track first? Will in- first on the way back to recovery.
person conferences return in 2021,
or will hotels need to rely on hosting continued on page 26
Jan/Feb
2021
Journal of
Corporate
Renewal
23
Parent companies and brand affiliations have
often been reliable sources of information
on potential success. Not anymore.
continued from page 23 steadiness of its business leading into businesses.2 The company that owns
the economic downturn and whether it the Ritz-Carlton Atlanta, the real estate
was in distress prior to the pandemic or investment trust Ashford Hospitality
COVID-Related Woes or became distressed because of COVID. Trust, owns 116 other hotels that also
Pre-COVID Distress? applied for PPP loans.3 To obtain such
It is not uncommon for hotels to Parent companies and brand affiliations funds, an applicant had to certify, in
experience slow periods. Economic have often been reliable sources of good faith, that “current economic
cycles are a routine and somewhat information on potential success. Not uncertainty makes the loan necessary
predictable occurrences. The current anymore. The Ritz-Carlton in downtown to support [its] ongoing operations.”
cycle, though, begs the question: if Atlanta applied for a potentially forgivable
a hotel went south before COVID, loan through the federal government’s What would cause a property like the
is it worth saving? A good indicator Paycheck Protection Program—a lifeline Atlanta Ritz-Carlton to need a PPP loan,
of a hotel’s potential success is the intended for small and independent unless the basis was truly pandemic-
BUY BODY OF KNOWLEDGE
$449 DIGITAL BUNDLE!
GREA
T
F OR
EXAM
PRE P
!
OWN THIS MUST-HAVE RESOURCE TODAY AT A GREAT DISCOUNT.
Jan/Feb Your digital purchase of $449 includes PDF downloads of all three newly refreshed books, covering
2021
Legal Principles, Accounting & Finance, and Management. Purchase today at tmacertification.org.
Journal of
Corporate
Renewal Already earned the CTP/CTA? Email swilliams@turnaround.org for a special discount code.
26
related? If the true reason for applying
for the loan was an unrelated or even
tangential issue, such as financial
distress caused by an inefficient
manager, poor financial planning, Morgan C. Fiander is an associate with Polsinelli
or outlandish corporate expenses, PC, focusing her practice in the Financial Services
this could violate the certification the Litigation and Bankruptcy and Restructuring practice
borrower signed to obtain the PPP funds. areas. She advises a variety of lenders, including banks,
Such a determination would render the hedge funds, private equity firms, and loan servicers
loan liable for repayment, throwing a in enforcing their rights and protecting their interests.
new, uncertain, and potentially volatile Fiander also represents creditors in bankruptcy
element into the equation. And, even proceedings and advises financial institutions in
if the Small Business Administration matters arising out of consumer protection laws.
doesn’t pursue violations of this
certification, there is nothing to stop a
U.S. Attorney’s office from investigating
and prosecuting a borrower for routine
bank fraud, i.e., for making a false
representation to obtain a loan.4
The limited scope of the PPP and the
potential that a loan will not be forgiven
in instances like that described are
The bottom line is that awareness, vigilance, and
elements of another key consideration:
hotel delinquencies were some of the diligence are more important now than ever when
first to report when the pandemic hit, but
are in the category of the least protected
type of businesses and loans. Residential
deciding whether to purchase distressed hotel debt.
mortgages and local small businesses are
garnering the most attention from the
media and the public in terms of needing
protection and saving. Hotels and large
chains are not getting any sympathy. mezzanine debt, holding subordinate other factors to keep an eye on but
debt of a borrower that can’t manage also make routine considerations
Past Behaviors Are to maintain any lender-borrower or of even greater significance.
Future Indicators creditor-debtor relationships is going to
Prior loans, lender relationships, be difficult to justify in this environment. Keeping all of these factors in mind,
management contracts, and vendor however, the question for investors
relationships can all be subtle but If the time frame permits, a potential really is not if but when to invest. Hotels
powerful indicators of how a borrower investor should look into the will bounce back eventually, and while
might comport itself moving forward underlying loan documents, the the industry may look different than
with a new lender. Have there been hotel’s management agreement, and before, those who are watching closely,
previous defaults or forbearances? Did other relevant documentation to and are ready to make the jump, will
prior lenders issue notices of default, ensure there are no inconsistencies be first in line for opportunities that
reservation of rights letters, waivers, or deficiencies that would jeopardize can end in substantial profit turns. J
or other documents which would the purchase or performance of the
signal concern? Has the hotel gone loan in the future. This should include
through a concerning management comparing the past lender behaviors 1
avid Flynn, “Post-Coronavirus, ‘normal’ travel
D
agreement or even a concerning discussed—or lack thereof—to the loan may not resume until 2023,” ExecutiveTraveller.
documents to ensure nothing could com, April 15, 2020, executivetraveller.
number of agreements with different
com/news/post-coronavirus-normal-
management companies? Has it be or was construed as a waiver or travel-may-not-resume-until-2023
changed major vendors or service acceptance of behavior that should 2
hannon K. Crawford, “Luxury hotels benefited
S
providers frequently? Has it gone constitute default or breach. An from PPP loans. So did the investment trusts that
through multiple brand affiliations or had investor should strive to understand own them,” abcNews, April 11, 2020, abcnews.
short periods of independent ownership? the borrower’s state of mind and how go.com/Business/luxury-hotels-benefited-ppp-
it might view the new relationship. loans-investment-trusts/story?id=70371142
3
Crawford, abcNews.
If the answer to too many of these
questions is yes, this might not be The Bottom Line 4
ason B. Freeman, “PPP Borrowers And False
J
Certifications: SBA Extends Amnesty Under
the time to take the risk—or at least The bottom line is that awareness,
Safe Harbor,” Forbes, May 6, 2020, forbes.
not without additional due diligence. vigilance, and diligence are more com/sites/jasonbfreeman/2020/05/06/
If there is a co-lender agreement, a important now than ever when ppp-borrowers-and-false-certifications-
potential investor should dig into how deciding whether to purchase last-call-for-sba-amnesty-under-safe-
Jan/Feb
distressed hotel debt. The unusual harbor/#:~:text=Lenders%20may%20rely%20
the parties have behaved and whether 2021
on%20a%20borrower%E2%80%99s%20-
any original co-lender to that agreement situational considerations created
certification%20regarding,have%20 Journal of
has since sold its position. Particularly by the COVID-19 pandemic not made%20the%20required%20 Corporate
for investors looking to purchase only present extra industries and certification%20in%20good%20faith Renewal
27You can also read
