The Covid-19 pandemic has triggered one of the worst demand crashes the global and Indian hospitality industry has witnessed in recorded history, in terms of fall in average room rates, revenues, profitability, and credit metrics (deteriorating debt repayment ability). To tide over this pandemic period of financial stress, the RBI has allowed corporates to avail of moratoriums on debt servicing from their lenders, across two phases, covering the period March to August 2020. In ICRA’s portfolio of hospitality companies, 66% of the companies applied for a moratorium during phase 1 and phase 2, as against 27% in the wider ICRA rated universe.
Giving more insights, Ms. Pavethra Ponniah, VP, and Sector Head, ICRA says, “The pan India lockdowns led to mass closure of hotels across the country. Demand petered off to below sustenance levels, limited to Government-mandated quarantine traveler, medics, and some business-continuity workers. Occupancies in the premium hotel category fell by 30-40% to ~8-12% in Q1 FY2021 while average room rates (ARR) fell by 30-50% across various markets, continuing close to the Government rate-controlled levels in several markets. Rate controls were applied by the Government for quarantine traffic. During Q1 FY2021, ICRA’s sample of hospitality companies reported an 86% decline in revenues with deep operating and net losses. Interest coverage fell from 2.0x in Q4 FY2020 to a deep red in Q1FY2021.”
The Kamath Committee II Limited Feasibility for the Hospitality Industry
Taking cognizance of the extent of distress, the RBI on September 7, 2020, under the ambit of the Kamath Committee allowed corporates to avail of loan restructuring for a period of two years, limited to debt distressed solely due to the pandemic. The guiding framework provided by the Committee which will be implemented by banks independently attempts to simplify the process of resolution while preventing evergreening of pre-COVID distress. Only borrowers classified by lenders as ‘Standard’ with less than 30 days of arrears as on March 1, 2020, will be eligible for the resolution framework. It allows lenders to approve the resolution framework for such entities provided that, supported by the restructuring and following improvement in performance, borrowers meet five sector-specific thresholds (See Exhibit 1) by March 31, 2022. Additionally, lenders are expected to ensure compliance with TOL/ATNW thresholds at the time of implementation itself.
(Source: Resolution Framework for Covid-19-related Stress – Financial Parameters)
( Total Debt / EBITDA = Addition of short-term and long-term debt divided by addition of profit before tax, interest, and finance charges along with depreciation and amortization.  Total Outside Liabilities / Adjusted Tangible Net Worth (TOL/ATNW) = Addition of long-term debt, short-term debt, current liabilities and provisions along with deferred tax liability divided by tangible net worth net of the investments and loans in the group and outside entities.  Average Debt Service Coverage Ratio (ADSCR) = Over the period of the loan addition of net cash accruals along with interest and finance charges divided by the addition of the current portion of long-term debt with interest and finance charges.  Debt Service Coverage Ratio (DSCR) = For the relevant year addition of net cash accruals along with interest and finance charges divided by the addition of the current portion of long-term debt with interest and finance charges.  Current Ratio = Current Assets divided by Current Liabilities)
A deep-dive into industry-wide pre-COVID levels for these five parameters highlights the following
1. Even during the decadal high of FY2019 for the hospitality industry, industry aggregates failed to meet some benchmarks, notably on Total Debt/OPBDITA. In the current scenario, the process of unlocking/scaling back would necessitate incremental borrowing to clear out working capital dues. Further, loss-funding would again require incremental borrowings, pushing TD/OPBDITA higher for the industry.
2. A further drill-down of the portfolio into rating categories highlights that entities in the BBB and below categories failed to meet the requisite benchmarks on at least 3 of the 5 parameters (with +- margin to accommodate company-specific accounting differences), including TD/OPBDITA.
3. Though pre-COVID TOL/TNW can currently be comfortably met by entities rated in the BB category and above, with losses wiping out the net worth during FY2020-21, several companies would require equity infusion to meet this threshold by March 31, 2022.
4. It is a given than hospitality entities in the BBB and below rating, categories would require more loan restructuring support. For a bulk of these companies, to meet the requisite criteria by March 31, 2022, these entities would have to achieve higher financial metrics than the pre-COVID level, a stretched target within a period of two years. Hence, the benchmark cut-offs and more importantly the limited time-frame to achieve these parameters may take these entities out of the eligibility bucket.
The resolution framework, in its current form, is unlikely to provide the much-needed succor to the weaker players in the hospitality industry.
Nearly 70% of ICRA’s rated portfolio faced negative action, with only downgrades and no upgrades in the post-COVID period. As for the change in rating outlook, for the rated portfolio, as in mid-September 2020, 34% of the portfolio had a stable outlook and 66% has a negative outlook with zero positive outlooks. This compares unfavorably with the pre-COVID period in January 2020 when 92% of the portfolio had a stable outlook, 4% had a positive outlook and an equal number had a negative outlook.
On the sector outlook, adds, Ms. Ponniah, “The Central Government allowed hotels to open on June 8, 2020, with considerable restrictions and safety checks. States took further time to formulate their SOPs leading to a staggering reopening of hotels. While by September 2020, almost all states allowed hotels to reopen (with local restrictions), considerable room inventory remains closed.
Several states have eased inter-state travel requirements like e-passes, mandatory quarantine, and COVID tests. Consequently, occupancies inched up to ~20% in July and August 20 with some demand also originating from drive-to leisure.
ICRA expects pan India occupancies for FY2021 to hit 30-35% and the ARRs to correct by ~20%. While the loan moratoriums have helped the industry address near term liquidity, the industry also needs to brace for a much longer period of muted demand resulting from the pandemic. Even post the initial phase, the unfolding economic crisis is likely to keep discretionary travel low for an extended period. Revenue per available room (RevPAR) recovery to pre- COVID levels is expected to take 2-3 years.
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2014 The Global Indian New Network (TGINN)