By Deepesh Thakrar, Senior Debt Finance Director at OakNorth Bank
It’s fair to say this year has been like no other in living memory and a sector that has been particularly hard-hit is hospitality. According to an industry survey in August, more than three-quarters of hospitality businesses in the UK are at risk of insolvency by next summer. While hopes of a vaccine may mean things start to feel slightly more normal by spring, a number of other factors – Brexit and potentially the worst recession in 300 years – mean there are still several hurdles for the sector to overcome in the months and years ahead.
On December 17th, it was reporter that the Chancellor will fortunately extend the government’s emergency loan schemes (CBILS, CLBILS and BBLS) once again until the end of the financial year in March. However, this news will come as a cold comfort to hospitality businesses if the banks they’re relying on to provide the loans aren’t currently willing to lend to the sector.
Having worked for traditional high-street banks both pre and post the 2008 financial crisis, this is something I saw quite a bit – certain sectors being temporarily “vetoed” or “black-listed” as ones the bank is unwilling to lend to. And it’s something that anecdotally we’ve heard from dozens of hoteliers we’ve spoken to since March – despite being strong, viable businesses, their bank has been unwilling to lend to them.
This has not been the case at OakNorth Bank – since March, we’ve approved over £1.5bn in new loans to businesses from a variety of sectors (including hospitality) and regions across the UK – a third of this has been via the CBILS and CLBILS. Some of the notable deals I’ve personally worked on in the hospitality sector, include a bespoke finance facility to The Jade Hotel, a family run establishment in South Kensington, a £3.7 debt finance facility to the Signet Hotel Group to refurbish and upgrade the Grade II listed Mitre Hotel at Hampton Court and a £30m loan to Staycity Group, Europe’s leading aparthotel operator, to fund its expansion plans.
I think what’s interesting about OakNorth Bank’s approach is that because of our expertise across both property development and SME trading deals, we can design a facility that allows the hotel business to buy the site, develop the hotel and cover the initial costs of operating it. This compares to other lenders who will typically make the borrower take out a facility to acquire the site, then a development facility to build it, and then they’ll have to refinance if they want the capital to run it. This process is hugely frustrating for the borrower as it means having to constantly interrupt their plans to go back to their bank and ask for more money.
As far as I’m aware, we’re one of the only lenders that will provide a financing solution for the whole process and can stretch this out over a 5-6 year term. Of course, this type of facility needs to work for both us as the lender and for the borrower, so typically interest payments will be higher during the initial buy and build / development phase. They will then reduce once the borrower completes the development and the hotel is operational, and then reduce again once the hotel hits its forecasted numbers.
By covering buy, build and stabilise under an agreement with ratcheted rates, the borrower cuts out the need to spend time refinancing once a new hotel is built out. One of the first deals we did like this was with Starboard Hotels on its Park Royal site which recently opened. Over the last 12 years, Starboard Hotels has established a sterling reputation in comprehensive hotel management and optimising asset performance, without compromising on exceptional customer service and guest experience. The Starboard team, led by Managing Director, Paul Callingham, are incredibly experienced and have a proven track record of successfully developing new hotels, as well as acquiring and expanding existing ones. While it’s been an incredibly tough year for the sector, it’s entrepreneurial, resilient businesses like Starboard and others such as those I mentioned earlier in this article, which reassure me that no matter the challenges ahead, the economy will bounce back.