Investing in Distressed Hotel Assets – What to Consider – Media, Telecommunications, IT, Entertainment
With the end of government support sparked by the Covid-19 pandemic, it is inevitable that some hotel owners unfortunately do not have the cash to continue operating in the medium term. Greedy investors see opportunities and wait to deploy capital. We examine the main considerations for investors looking to purchase distressed hotel assets as part of an insolvency process.
On July 30, 2021, the UK Insolvency Service released its latest business insolvency statistics for the second quarter of 2021, which showed that due to the strength of government support measures, insolvency rates remain significantly lower than pre-pandemic rates.
With forced closures, occupancy rates in London at record highs and travel restrictions persisting despite vaccine rollout, the UK hotel sector has been one of the real estate sectors hardest hit during the Covid pandemic- 19. The low levels of corporate insolvency have been driven by support offered by the UK government, such as moratoriums on confiscation and liquidation petitions, the unprecedented scale of the coronavirus job retention program and the availability of HMRC deferrals and VAT reductions, among others. measures. But support is coming to an end. There is an unfortunate fate that some hotel owners, some of whom have not paid owners or suppliers since the start of the pandemic, will not have the cash flow to continue operating in the medium term. This has caught the attention of investors, who are preparing to deploy capital once the troubled opportunities materialize.
In this first part of a three-part series of articles, we take a look at key considerations for investors looking to buy distressed hotel assets as part of an insolvency process. The following articles in our series will examine the key provisions of hotel management and franchise agreements in the context of a troubled hotel sale. We expect the wave of hotel distress to be global and will focus on the relevant considerations in other global jurisdictions including the United States, France and Asia.
PART I: Acquisition of the business and assets of a hotelier in insolvency proceedings in the United Kingdom
When expedited M&A processes are executed, bidders will often be faced with the possibility of acquiring the business and target assets through a pre-packaged administrative sale, as opposed to a more usual acquisition from ‘a solvent seller (although stressed or even in difficulty). But what does this mean and what, in a hotel context, a bidder should be particularly careful about when acquiring a business and assets from a director (rather than on a solvent)?
A pre-pack is a sale of all or part of the activity and assets of a struggling company before the appointment of directors, and then finalized very soon after the start of administration. While pre-packs have long attracted criticism and been pressured for reform (leading to the recent change in UK insolvency law requiring independent assessment from one pre-pack to one). related part, as our colleague Phil de Vries INSERT LINK comments), they remain an important part of the restructuring landscape in the UK. They also present particularly attractive benefits for buyers who are able to “pick” the group’s valuable assets, leaving behind liabilities, unsustainable contracts and other less desirable corporate assets.
Whether it’s bidding to acquire a hotel asset as part of a pre-pack or making an acquisition from directors who have already been appointed and continue to negotiate the hotel, the key point in both case if this investor is no longer negotiating with a solvent company. Instead, you are dealing with an insolvent company acting by directors, who are qualified insolvency practitioners whose goal is to realize the seller’s property and assets for the benefit of its creditors. The main objectives for administrators in this sales process will be:
- speed and security of execution by a buyer;
- maximizing the value of day 1 to obtain the best price reasonably possible;
- ensure that the relevant secured creditors have approved the deal on the table; and
- transaction on a no-take-back basis with the usual protections for administrators being included in the documentation.
This last point is the most important point a buyer should be aware of, as administrators will not be able to offer the buyer any of the usual contractual protections. An administrative asset purchase contract will seem both strange and familiar to buyers and their legal advisers. The main difference is the clause entitled “exclusion of personal liability and guarantees”. As the directors have limited information about the company and the assets, they contract on the basis that no representation, guarantee, condition or indemnity will be given. We frequently act on behalf of admins to buyers whose first mark-up introduces large expanses of such protections, but they are almost certainly a failure from an admins point of view, delaying things and hurting them. potentially to the buyer’s credibility vis-à-vis administrators and secured creditors in the Context.
While administrators may possibly assist with due diligence matters – on a strictly unfounded basis – an investor must ultimately agree to purchase any right, title and interest (if any) that the seller has in the company and underlying assets and on a “sold as seen” basis. It is therefore incumbent on the buyer and his board to focus on assets of strategic value and importance to the business in order to obtain as much comfort as to title and condition as possible in the time available. Typical recurring issues in a hotel setting include:
- Who owns the FF&E and the hotel’s brand image?
- Who are the IT vendors and other critics and what is their current position on payment arrears?
- what intellectual property licenses are in place and are they subject to termination during administration?
- regulatory issues such as position with premises licenses, marriage licenses and special treatments.
While innovative guarantee and indemnity insurance products such as synthetic guarantees may be available, they can be expensive and, in the end, insurers are likely to expect a detailed due diligence process. be carried out. This can obviously affect an acquisition timeframe and can ultimately cost the buyer the sale if another buyer is willing to take out without insurance in place.
Other considerations for the administrator
In addition to the absence of the usual contractual protections, the directors will demand from the buyer a wide range of general indemnities for liabilities that may arise against the seller or directors in relation to the business and the assets sold. . Buyers should expect the following to all fall under such broad indemnities:
- company employees;
- the buyer’s use of information technology, intellectual property and trade names;
- personal data / GDPR; and
- Third party title deed or leased hotel assets that are included in the sale.
With limited time for due diligence and potentially a lack of information available, priority should be given to areas such as these that could expose an SPV buyer to significant or unexpected liability. In a hotel context, the question of whether the ownership of the inventory remains with an unpaid supplier subject to retention of title is often a special issue to be resolved as quickly as possible, since the buyer must assume this risk.
It is also the buyer’s responsibility to ensure that the formalities of the transfer of assets are handled and, although the administrators generally assist in executing the transfer of ownership documents subject to the usual protections and exclusions regarding representation and warranties. , a buyer will need to ensure that everything essential is properly transferred to the extent possible upon completion.
It may often be necessary to use other insurance arrangements to obtain assistance from administrators after completion, but these arrangements are often short-term in nature and come with the obligation to pay fees. of directors, as well as those of their attorneys, resolving issues with pre-completion can be a significant savings for the buyer.
A final question is whether the buyer will agree to honor deposits and prepayments made for hotel reservations after completion. While customers may have potential claims under Section 75 of the Customer Credit Act or the “chargeback” program, failure to accept such bookings can lead to goodwill issues and of commercial reputation, even if the deposit or the prepayment will have been used before the administration and is not available to the buyer.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.