To everyone in the hospitality industry: an investment banker’s view of crisis




Andrew Harrington of AHV Associates gives his perspective on the coronavirus crisis and its effects on the hospitality industry.

Crises aren’t new - every five to 10 years, there seems to be a major one.

In 1987, when I started my career in finance, there was the stock market crash. In the mid/late 1990s the Asian debt crisis and in the 2000s we had the dot com crash, 9/11 and the mother of them all - the 2008 financial crisis.

On each occasion, the general consensus was that we had not seen anything like it before and that it would change the world...and on each occasion, the general consensus was right, as it is now.

The current crisis is different, because it is not financial in origin. In many respects it is like 9/11. Furthermore, we know how to deal with it as the science is clear.

The key is that the current non-financial crisis doesn’t lead to a financial/economic one. Fortunately governments understand that and have taken very aggressive action to prevent it. Time will tell as to whether the action taken will work.

However, we are now in the eye of the storm and it can be very difficult to stand back and review things from a distance.  My experience has taught me that now is a good time to force oneself to look through the current panic and focus in on the key factors that will determine the future of the economy generally, and all our respective businesses in particular. 

Thinking clearly now is really important as it will provide perspective on the current situation and enable the implementation of a well thought through strategy to survive and prosper post crisis.

Do not forget that we know how to resolve the crisis, and it is on the way to being resolved in China, South Korea, Japan and other south-east Asian nations. In many of these countries, economic activity is now rising strongly.

So far, governments have generally responded rapidly and effectively to ensure that businesses can survive the current crisis whilst continuing to pay employees. Banks have also been very helpful through delaying repayments and waiving covenants, and are set to provide government backed emergency credit, where needed. Landlords also seem to be pretty flexible and are willing to provide rent holidays or temporary reductions. These measures are critical as they remove the key link between a health crisis and an economic one. Governments have learnt lessons from the 2008 global financial crisis when it took over a year for them to provide substantial support to the economy. In short, provided the extent of government support promised is promptly delivered, there is no reason why affected businesses should not survive, despite the often precipitous drops in revenues.

The financial system is very strong - bank capital is now many times higher than in 2007 and lending regulations have been much tighter in the period since then. All of this means that banks are now in a much better position to weather the storm and continue to provide credit, than in the post 2008 period.

Furthermore, there are billions of euros, dollars and pounds in captive investment funds, many of which have substantial unspent dry powder. Dry powder levels are 1.5 to two times the levels in 2008. In addition, interest rates are at all-time lows, and probably going even lower so that if the banks and funds want to invest profitably, then their only alternative is to lend/Invest in the real economy. 

With early and substantial government action having limited the scope of bankruptcies, there should be a rapid upturn in the flow of finance once it is apparent that there is a clear pathway to the resolution of the crisis.

At that point, equity and debt investors will be very keen to review company business plans/financing requirements as it will then be possible to make meaningful predictions as to the path of the business in the future, and assess investment risks etc. From that pricing and valuations can be determined and funding should start to flow.

To be clear, a return to normality is not a necessity for finance to flow, just a clear pathway to that point. As they say in the financial world: "Buy on the rumour, sell on the news!"

The crisis could result in the way business is done in the future changing, in ways that we do not yet understand. However, such effects usually take a long time to show up.

This obviously could have implications for the hospitality industry but the underpinning to its success over the decades is that we humans are inherently social animals so we find it much easier to communicate in person rather than on a video call!. We also like to explore and share new experiences.

These two simple facts  have enabled the hospitality sector to survive all of the crises mentioned above and, in all cases, emerge stronger.

So, assuming that the short-term economic damage is limited, due to the swift actions of governments outlined above then, post crisis, there must be a good arguable case that the key drivers of the hospitality industry - business and leisure travel - should at least continue along the same growth path as before.

There is also likely to be a chronology to the hospitality industry getting back on its feet. This will be to some degree dependent on when and how the various lockdowns in force are relaxed.

I would expect all aspects of domestic business and leisure travel to pick up pretty quickly once the hotels are reopened and travel is permitted. This will be driven by the desire for people to not travel too far from home, in case there is a sudden outbreak of coronavirus cases and a total or partial lockdown is reinstated. It will also be driven by the basic human need to meet people again, which will come as a relief to many of us!

Next will come international business travel, as companies will want to reconnect directly with their overseas customers and suppliers.

International leisure travel is likely to be one of last pieces to fall in to place, and will be dependent in large part on the degree of friction at airports and the degree to which countries still have controls on people entering.

There is a debate in the hospitality community as to whether international conferences will be a permanent casualty of the crisis. I am very much in the camp that they will not be, and that they may in fact get a bit of a boost as the value of meeting people face-to-face can only be reinforced by an extended period when that has not been possible. There is the legitimate question of timing and it is realistic to assume that international conferences will be the last part of the industry to get back to normal.

However, I am firmly of the view that within six months of the end of all restrictions, hospitality will be back on its feet.

From a financing perspective, businesses that were strong before the crisis should be strong afterwards. Development projects that were viable before the crisis will be viable after the crisis. Acquisitions that made sense before will make sense after.

People ask me when normal service will be resumed to which I say that financial markets are a leading indicator of activity in the real economy. They are extremely volatile because right now it is not possible to make any meaningful predictions as to when the crisis will be over.

As soon as some clear data points emerge such as the rate of infections showing steady decline, a clear start to widespread testing, signs that  government measures are working, then you are likely to see a strong rally in financial markets, as the uncertainty starts to decline and investors are able to begin making predictions on the outlook for economic activity, whilst being able to assess the risks associated with those predictions. This ability to make forecasts and assess risk are prerequisites for debt and equity investors to value companies and price risk, which in turn enables them to commit to supporting funding opportunities.

That will be the beginning of the end for this crisis, and that is the time by which post Covid-19 strategies need to have been thought through, ready for implementation.

I don’t know when normal service will be resumed but I do know that our financial system is strong, governments have reacted quickly and the measures that we know are required to resolve the crisis are being taken.

Furthermore the key trends that have driven the hospitality business for decades are still in place and that there are good reasons to believe that they will reassert themselves relatively quickly, once restrictions are removed.

The time to start planning is now.

Click here to download a report from AHV Associates on the fundamentals underlying the hospitality industry's performance.

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