Four months ago I posted this article on the impact of Omicron related restrictions and other economic headwinds on an already battered hospitality and leisure sector. Operators in these sectors have worked so hard to survive the Covid-era by cutting costs, seeking operational efficiencies, and negotiating support from stakeholders and we all hoped that Omicron was but a short-term delay in the return to normalcy.

However, little did we realise that things were about to get even more difficult for us all and in just a few short months since my article we have seen the Russian invasion of Ukraine, massive increases in energy/gas prices and the rising price of fuel. One doesn’t have to be Adam Smith, the philosopher credited as the ‘father of modern-day economics’, to predict rising inflation and commodity prices will lead to a hit on consumer confidence. Indeed, some may argue that we haven’t had a period of true inflation for some decades.

In recent times, financial headlines have been dominated by the collapse of energy companies and failures due to Russia-related sanctions, but I can’t help thinking the hospitality sector will yet succumb to all of the aforementioned headwinds and have no alternative but seek salvation through restructuring regimes.

In the last 2 months alone I have had been introduced to six different hotel matters – ranging from portfolios to single assets with a mix of tenures, geographies and offering / target market. Each situation has required restructuring-style insights to their overlapping but different subset of challenges. Recurring themes have been:

• Looming unavoidable capital expenditure needed to remediate assets, maintain brand standards or even fund the prospect of cladding reparations
• Increasing energy costs, with one hotelier noting a 250% increase YOY for January 2022 which, if continued, will wipe out EBITDA for the year and eradicate ability to service capital obligations
• Continuing staffing constraints, with the Office of National Statistics noting a 700% increase in vacancies in the hospitality sector from November 2021 to January 2022
• Increasing staff remuneration packages including salaries and benefits (such as retention/joining bonuses, time off and flexibility)
• Ability to support the existing capital stack, and in particular debt multiples, given uncertainty over future Net Operating Income (with associated Debt Service Cover and Interest Cover Ratio covenants)

We are at an interesting economic juxtaposition – having ostensibly survived Brexit and the Covid-era (primarily through taxpayer funded support schemes) there is huge appetite to travel and experience life as we knew it. However, weakening consumer confidence and potentially rampant inflation means that we have yet more challenges to face before truly entering into an economic recovery phase.

My conclusion is that we are starting to see economic pressure build across all sectors including hotels and hospitality, and I believe that many good assets will yet require restructuring – not because they are under-performing (and certainly not against the market), but because their existing debt and equity simply cannot support future capital needs during yet another period of operational and trading uncertainties.

The nature of the required restructuring will very much depend on specific circumstances – ideally rebuilding operational, market or financial models (or more likely a combination thereof) but as I have seen already there will sadly be a requirement for more hostile/interventionist strategies.

So, I repeat my previous advice which remains true – “Underwriting the Future” now will be vital for hospitality businesses and their capital providers to survive the coming period and then strive for full recovery.