Indian hotel chain operator Hotel Leelaventure still has a R5,000 crore (more than $1 billion) loan outstanding on its books, and has found a solution to pay down the debt. By signing management contracts for both the hotel properties it sells and new properties coming online, the company may be able to get the valuation it needs.
Vivek Nair, chairman and managing director of Hotel Leelaventure, told the Financial Express that the company's sale-and-management-contract plan was part of a “strategy to reduce our debt, follow an asset-light strategy and manage more hotels.” The income from the management contracts--"about" 10 of which are lined up--could offset the loss of ownership revenue.
But Mandeep Lamba, managing director for India Hotels and Hospitality Group at Jones Lang LaSalle, suggested that the move may not help the company much because“the quantum of debt is severe and the (management) fees are not going to be commensurate.”
If this plan does not help, the paper notes that Hotel Leelaventure has other options available. The company is reportedly pursuing a viable restructuring package with the Asset Reconstruction company that could give it more time to repay its loans and reduce interest payouts. Nair is also prepared to dilute promoters’ holdings: “We, the promoters, have 64-percent stake, so there is also scope for dilution as long as we are able to maintain overall control,” he had said after the company sold the Hotel Leela Goa on a slump basis for a lump-sum consideration of R725 crore to Ceres Hotels Pvt. Ltd., a subsidiary of MetTube Sdn. Bhd. of Malaysia, by way of a business transfer agreement.
During the last financial year, Hotel Leelaventure’s net loss narrowed from R441.50 crore a year earlier to R415.88 crore because its interest costs fell by 60 percent to R197.57 crore, after repayment of some of its loans. However, the overall debt grew marginally from R4,972.32 crore to R5,047.25 crore because the company defaulted on some other repayments.
Sign of a larger problem?
Hotel Leelaventure's issues may be indicative of a greater problem facing India's hotel scene. “There are a lot of properties under stress,” Lamba told the Financial Express in another story, noting a high level of debt.
In a bid to recover loans, bankers are reportedly pushing investors involved in luxury hotel properties to sell their stakes. This year has seen the most deals in the sector since 2008, with seven large deals ranging between R90 crore and R725 crore taking place in the starred sector, according to Jones Lang LaSalle Property Consultants India. Even without three more potential deals that could take the total number to 10, 2015 will still have seen the highest number of transactions in the past eight years.
The story explains that investors from other industries purchased land at higher costs using high-interest loans to build luxury hotel properties, but the global fiscal crisis and India's own economic slowdown (though not a downturn) has affected the hospitality industry because business travel did not reach expected numbers and supply exceeded demand.
Even attempts to recast loans did not succeed following pressure from banks for returns in a bid to avoid non-performing assets. “The equation is beginning to change,” Lamba said. “Hotel transactions are only going to increase and transactions are going to get realistic.”
This may, of course, provide an opportunity for foreign investors. As the Hindustan Times notes, much of India's hotel expansion is from international brands. Indian hotel brands like ITC, Oberoi, Taj and Leela open about three new hotels a year--combined. The foreign chains, put together, open between 20 to 30 new properties per year.