Luxury hotel chain operator Hotel Leelaventure Ltd has opted for an old formula to tackle the Rs 5,000 crore loan outstanding on its books: signing management contracts for the hotel properties it sells, as also new properties. Whether this will work and to what extent remains to be seen, as only a revival of the real estate market can fetch the chain right valuations for its properties.
In May 2014, the Corporate Debt Restructuring (CDR) mechanism the company had earlier taken recourse to—under which it was to bring down its debt by R2,030.76 crore through sale of its Delhi hotel property—was declared a failure by the Empowered Group. Following the decision, “14 of the erstwhile CDR lenders with exposure of about 95.6% of the CDR debt assigned their debt to JM Financial Asset Reconstruction Company Pvt. Ltd., (JMFARC) and one lender with exposure of about 1% of the CDR debt to Phoenix ARC Pvt. Ltd,” to sell/monetise the group’s non-core assets and also sell some of its hotels.
In June 2012, the company had taken an approval from its lenders to repay R4,300 crore worth of loans by selling its assets. According to the CDR mechanism, Hotel Leelaventure had to sell its Delhi hotel property by March 2014, a commitment it failed to keep because of “continued economic recession” in the national capital that hurt real estate prices and valuations.
Now, as part of its new strategy, in late September the company sold its Goa property on a slump basis for a lump-sum consideration of Rs 725 crore to Ceres Hotels Pvt. Ltd., a subsidiary of MetTube Sdn. Bhd. of Malaysia, by way of a business transfer agreement. Vivek Nair, chairman and managing director of Hotel Leelaventure Ltd says the move to go in for a sale-and-management contract was part of a “strategy to reduce our debt, follow an asset light strategy and manage more hotels.” He says, “We have about 10 new management contracts lined up so what we would lose in terms of the GOPs of Goa would be made up for by management of those.”
“Management contracts is one of the fastest ways to grow in the hotel business,” says Mandeep S Lamba, managing director for India Hotels and Hospitality Group at Jones Lang LaSalle, a consulting firm. In the case of Hotel Leelaventure though, the move may not help the company much as “the quantum of debt is severe and the (management) fees is not going to be commensurate,” he cautions.
During the last financial year, Hotel Leelaventure’s net loss narrowed from Rs 441.50 crore a year earlier to Rs 415.88 crore, as its interest costs fell by 60% to R197.57 crore, after repayment of some of its loans. However, the overall debt grew marginally from R4,972.32 crore to R5,047.25 crore, as the company defaulted on some other repayments.
Hotel Leelaventure seems to have plans B and C in place. One, the company is pursuing with the Asset Reconstruction company, “a viable restructuring package and expects to get approval during the current year.” This could give it more time to repay its loans and also reduce interest payouts. Second, Nair is prepared to dilute promoters’ holdings. “We, the promoters have 64% stake, so there is also scope for dilution as long as we are able to maintain overall control,” he had said after the sale of the Goa property.
At end March 2015, the company had net fixed assets, capital work progress and assets of Rs 5,308.25 crore compared to Rs 5,691.29 crore a year ago, even as its net worth turned negative to the extent of Rs 418.75 crore. “Even though the net worth has turned negative during the year, the same could again become positive when financial restructuring materialises,” the company says.
However, for all the deals the company has planned to go through, real estate prices need to revive. This, experts say, is unlikely to happen right away.