UK: Hotel Administrations Sector Shows Signs Of Reliving The Early Nineties Recession

Last Updated: 15 November 2012
Article by Henry Shinners

Despite the summer of sport, 2012 has been a difficult year for hoteliers.

Asset prices and buyer interest that seem to fluctuate with the fortunes of a Premier League football club, a decommissioned experimental nuclear reactor, companies in administration that turn out to be solvent, incumbent operator tenants trying to hold us to ransom and shareholders with a financial interest that can't be traced – the lot of a Smith & Williamson insolvency practitioner dealing with our many hotel insolvencies during 2012.

As we go to press, we are dealing with the administrations of trading hotels in Guildford, Leatherhead, Hemel Hempstead, Farnham, Solihull and Aldermaston. Now why, I hear you ask, are some hotels in the South East of England – in locations within easy commute of central London – going into administration during a summer when we have surely had a record number of visitors to the area for the Olympics and Paralympics? That's not a question I have a definitive answer to, but the underlying reasons for failures in this sector can be summarised in a few short bullet points.

  • Businesses significantly geared up or were subject to highly leveraged buyouts in the pre-credit crunch period.
  • In some cases, these businesses also committed to interest rate hedges that meant that they have not benefitted from the low interest rate environment we have seen in recent years.
  • Businesses have experienced falling occupancy levels and/or downward pressure on fee rates as demand has weakened as a consequence of the recession and low business and consumer confidence. This of course ignores the Olympic effect.
  • As a general comment, poorly-managed businesses will always be vulnerable to failure, regardless of the wider sector and macro-economic conditions.

While we can't extrapolate our own involvement in a number of hotel insolvencies this year into a barometer of wider problems within the sector, there are some indications that we are seeing some patterns similar to that experienced in the sector during the early nineties recession, when hotel insolvencies were rife.

Perhaps the most interesting example we have seen this year is Aldermaston Court. This assignment consisted of the insolvency of two connected companies and the following assets:

  • the Manor Hotel – a grade II listed hotel with 33 bedrooms
  • Portland House – an 85,000ft² "iconic and award-winning" office complex which has been unoccupied since the Atomic Weapons Establishment vacated in early 2010
  • Oxford House – a derelict 15,000ft² former office space
  • residential lodges – four lodges, two of which are occupied
  • 144 acres of grounds consisting of woodland, grassland and an 11 acre lake.

By far the most interesting fact about this assignment is that from July 1959 to August 1962, a small privately-owned experimental nuclear reactor (Merlin) was operated in the grounds of Aldermaston Court and (sealed) pipes passing under the waters of the lake were used for secondary cooling. As if that were not 'interesting' enough, the water used on the estate is supplied from a borehole located within the grounds. However, I'm assured the facility is not radioactive and we expect to have concluded a sale of the assets by the time this article appears in print.

Keys to a successful hotel administration

In general terms, maximising the price that can be obtained for a hotel requires the business to be a going concern and trading well, even if the owner is in administration. Making sure that a competent operator or management team is in place for any trading that is to be carried out during the administration is therefore crucial to the outcome. This may involve the replacement of an incumbent operator or parachuting in a new manager in circumstances where trading is not at the expected level and especially in circumstances where the way the hotel has been run has contributed to the failure of the business. We have worked with a number of independent operators in this sector over the years and have found very close co-operation between our team and the operator/manager to be essential for achieving the best outcome for stakeholders.

Another key aspect to bear in mind when dealing with a turnaround or insolvency of any consumer-facing business is the position of the merchant acquirers. If that is not a phrase that is familiar to you, the merchant acquirers are the suppliers of debit and credit card machines and they are the ones who ultimately bear the cost if a consumer makes a claim to their credit card company for non-delivery of goods or services paid for by credit card. In any business where there is a delay between payment and supply, the merchant acquirers have a potential liability and it is extremely important to have them onside with our strategy because without the ability to accept credit cards, a hotel is not a viable business.

Finally, so much of a hotel's day-to-day business these days is generated online through travel booking websites that the operators of those websites are often a key stakeholder, particularly in circumstances where they are owed substantial sums of money. As with the merchant acquirers, getting the co-operation of the booking websites is critical to the success of any hotel turnaround or insolvency.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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