Financial, legal considerations to note

Disruptions caused by the impact of Covid-19 have created a mixed bag of opportunities and challenges for all sectors of the economy.  Its impact on the hospitality sector, especially hotels has also affected banks.

Hotels are in urgent need of liquidity. Globally, it is expected that recovery in the anchor travel sector will be slower than after the SARS outbreak and 9/11 terror attacks.
 
According to The Independent, and the Uganda Hotel Owners Association, from March to June 2020 there were massive cancellations of reservations leading to dismal occupancy rates great losses for the sector.

The bulk of hotel staff were either sent on unpaid leave, suffered pay cuts or were laid-off. Currently, Uganda has an apparent oversupply of hotel beds. Industry stakeholders are deliberating on possible solutions to this conundrum, one being revamping domestic opportunities requiring a rethinking of business models.

 This context needs to be appreciated well-knowing that the extent of impacts and possibilities of recovery might vary depending on the classification of the different hotels banked.  Some financial considerations for banks should include:
Nature and extent of measures put in place by the hotel client(s) to monitor liquidity.

The impact of the chosen trading strategy on liquidity requirement as operations are ramped up and government (BOU) support schemes ends;

Level of flexibility in the hotel’s capital structure to execute short term changes or access additional liquidity.
Nature of prevailing medium to longer term financial obligations of the hotel and whether a strategy has been identified to meet these.

Some legal considerations include:
Open and clear communication with their respective borrowers and, where necessary, seek to enter into corrective agreements and/or provide additional bridging finance. It is crucial to ensure that the relevant waiver or amendment of the underlying documentation does not damage the integrity of the existing guarantees or security;

The possibility of carrying out a consensual restructuring of the facilities based on available information;
Obtainment of additional guarantees or new security from the borrower by way of additional credit support that may include security over additional assets or guarantees from more credit worthy entities, the integrity of these being key;

Due diligence to determine the quality of their security package to better understand the nature and credit context of the assets that have been secured, the type of security over those assets;

Bank guarantees or credit insurance type products that seek to insure or guarantee all or part of the loans made available, and whether there is coverage over the pandemic and attendant responses thereto;
For syndications, banks should look closely at intercreditor issues and arrangements that may affect the priority of payment or ranking of security among various creditors of the borrower or borrower group;

Any new bridging finance should consider whether the intercreditor arrangements provide for the new facilities being  first ranking ahead pre-existing facilities; and
Ultimately banks may also decide to cut their losses and enforce its security. Here they should consider inter-lender agreements, reputation, applicable law, etc.

They should assess the short to medium term credit/liquidity risk of the borrower and determine if it is better to keep it trading.
Banks need to critically examine the options available to them basing on the specific needs and circumstances of their hotel clients in the sector so as to help improve outcomes in the longer term.

This article was jointly authored by Mr  Yosia Sekiremba, Mr Robert Apenya and  Mr Felix Manzano who are part of the restructuring teams at Ernst & Young and Engoru Mutebi Advocates.