21 Jul Covid 19 Hotel Loans
In the words of J Paul Getty, “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem”.
Mr. Getty did not amass his legendary fortune by being ignorant and by failing to understand business and business relationships. However, the state of the hospitality industry and its associated debt probably more closely conforms to this quote by Sax Rohmer,
“I gain nothing by having a rock in my boxing glove if the other fellow has one too.”. Currently both lenders and borrowers have rocks in their gloves.
Typically, when dealing with a problem one defines the issue or issues, determines its scope, nature, ramifications, and ultimately formulates a solution; provided one is achievable. Unless one has lived in total isolation, the problem facing hoteliers and their financiers is obvious and currently seems ever present. So, let’s move on to its ramifications.
Currently nearly every loan associated with a hospitality asset is in violation of at least one loan covenant. The breach may be as benign as accepting a PPP loan without the prior consent of the lender, to more serious problems, such as falling below loan to value coverage requirements, all the way to the coup de gras: closure of the hotel. Technically, should the lender wish, it can take action to ensure the terms of the loan documents are no longer in breach, or if there are no notice and cure provisions, call the note.
According to Trepp, using the latest September remittance data, the CMBS loan forbearance total has risen to $31.2 billion encompassing approximately 800 loans. About 64% of the forbearances granted thus far have been for hotel loans. While delinquency rates are trending downward, special servicing rates have increased from 2.83% in March to 10.48% in September. Lodging and retail special CMBS servicing rates were the highest on record. The difference in the delinquency and special servicing rate trend is because, while forbearance switches a loan’s status from delinquent to current, the loan, if stressed, still continues to be specially serviced.
The majority of hospitality debt is held not by bondholders, but by banks, credit unions, insurance companies, and private lenders. While the magnitude of bad debt is not known, most analysts suspect the delinquency and breach of covenants are likely higher for this cohort than the CMBS market. This is because these loans include construction, bridge, and permanent loans to borrowers who are most likely not as large and whose assets may not meet the more stringent requirements necessary to sell their paper in the secondary market. Trepp estimates 12% of all CMBS loans will be foreclosed on as a result of the coronavirus crisis. Half of U.S. hotel owners claim they are in danger of foreclosure by their lenders due to the pandemic, (American Hotel & Lodging Association report). This amount dwarfs the $100 million alluded to by Mr. Getty.