Options and Opportunities for Hotel Owners in the Wake of COVID-19
The numbers alone are enough to cause a fever. For the hospitality industry, COVID-19’s symptoms include single-digit to zero occupancy rates, plummeting revenue available per room (revpar) and forced closures. Many businesses in the industry will struggle to survive.
Boston-based law firm Brown Rudnick has re-mobilized its resources to be on top of the challenges facing the industry and track the government responses. ITS corporate, finance and restructuring teams are closely coordinating to advise clients in real time on how best to react to the current environment. These are some of our suggestions so far:
• Borrowers should be re-familiarizing themselves with their financing documents, particularly the financial covenants provisions. Financial covenants are generally used as an early-warning indicator that the financial health of a borrower is slowing or failing. Although the trend in recent years in the U.S. and Europe are “covenant-lite” facilities, the impact of COVID-19 has led to such significant trading challenges with an almost overnight reduction in revenue meaning that financial covenants may well already have been breached.
In the context of reviewing financial covenants, a borrower should consider: whether the covenants are calculated and tested on historic performance or if there is also a forward-looking element; how much head room has been built into the covenants and whether any add-backs are available, which could be used to limit the impact of decreased net income; and whether there are any cure rights available which obligors may be in a position to exercise. Borrowers should also be wary of material adverse change (MAC) clauses in finance documents, giving lenders further leverage to negotiate in a distressed situation.
• Early engagement with lenders is key, and if lenders have not yet been in contact it’s never too early to be picking up the phone to call the relationship manager and updating that person on where things stand and what options are available.
These options may include a financial covenant holiday, waiver of a financial covenant breach or amending the financial covenant provisions. In any amendments to the financing documents, it will be necessary to strike the right balance between agreeing amendments, which will provide lenders with the comfort that they may require in these turbulent times as against tightening terms to such extent that borrowers find themselves unable to effectively manage their businesses.
There is good news. Most lenders will be willing to entertain discussions to deal with the emergency and unforeseen disruption. Enforcing is a pain for lenders, in the best of times, and more so in a disrupted market (if we learned anything in the last financial crisis). And where there are large numbers of potential defaults, lenders will be grateful for borrowers showing initiative and realistic survival plans. The drops in interest rates will also help with debt pegged to official rates.
• Plans and proposals need to be realistic, or at least have reasonable assumptions about how the situation will play out. The shock is a minefield for company directors, who need to consider their duties carefully and avoid potential personal liability in the event that trading continues in an irreparably insolvent position.
Nick Vasquez and Monika Lorenzo-Perez are partners at the Boston-based law firm Brown Rudnick LLP.