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The Caterer

Lenders have been to hell and back

30 November 2006
Lenders have been to hell and back

I read with great interest your article headed "Hotel market not in danger of meltdown" (Caterer, 23 November, page 12), and as one who falls into the category of adviser to the sector I wholly concur with the majority of the comments made.

Concentrating on the day-to-day hotel funding market, ie, funding for operators rather than investors, no matter how high we, the advisers, try to raise the bar, the experienced lenders in the sector have set lending parameters that all applications must satisfy.

I've always believed a percentage loan-to-value criterion is immaterial - the percentage game came into play when the lenders relied upon the existence of a bricks-and-mortar value. Then, traditionally 30% of valuation reflected the goodwill and fixture and fittings, thus the 70% LTV (loan to value) was born.

As we discovered in the 1990s, a closed unit very rarely recovers anything like the "bricks-and-mortar value". The valuation books have been rewritten, and most lenders now rely on a cocktail of values, to include Market Value 3, which assumes the unit is closed, the inventory removed and a limited timescale in which to achieve a sale.

Today, while each lender has a proffered maximum LTV, most are prepared to think outside the box, and - guess what - actually look at what the business can afford. If we assume a sensible interest covenant of 200%, and when applied to a hotel's historic EBITDA it equates to say 80% LTV, then why not lend? Equally, if a business put under the same test funds only 60%, that will be the limit.

The idea that the sector is boiling over is nonsense. As Jeremy Hill said in your article, the whole Swallow set-up was bonkers. I'm looking at a case at the moment where the historic EBITDA was £190,000 and the rent payable was £220,000 - it doesn't take a genius to work that one out. When bankers begin to cast doubt on other established lenders this is generally reflective of their not moving with the market, or having an inflexible risk policy, and has nothing to do with the bar being raised to an unsustainable level.

Lenders to the sector have been to hell and back once already, and I can assure you none that I know ever wants to go there again.

Hugh Caven
Managing director, Walbrook Commercial Finance, Tunbridge Wells, Kent

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