THIS CHART, TAKEN from figures published last month by the Central Bank, shows how many companies in different sectors that have debt greater than their annual turnover.
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As we reported at the time, the study actually revealed that the debt burden for Irish SMEs may be less than originally thought.
However, as can be seen, the hotel and restaurant sector is comfortable outstripping the competition, with a grand total of 17.8 per cent of companies surveyed carrying heavy debt – more than one times their annual turnover.
But how did this happen? Even in an economy that was drinking from a debt firehose, hotels seem to have come out worse off.
Tom Barrett, head of property consultancy Savills’ hotel group, says that in addition to the normal factors that drove companies and individuals to take on too much debt, other factors were at play for hotels.
“Like everything else, there was a boom economy. People had jobs, we were going for more weekends in hotels where we went for B&Bs beforehand.”
“But there was tax incentives to build hotels. Planners also like them, they were open for 24 hours, they provided tax and employment, it was great.”
The only thing we failed to look at as an industry was whether there was a need for a hotel in towns X, Y and Z.
Owen Travers, a director of corporate banking with AIB who specialises in the hotels & hospitality sector, agrees.
“I think there was a huge expansion in capacity, hotels were a popular asset class with developers. A lot of the hotels that were built were developer rather than demand driven.”
Debt wipe-out
Travers argues that many hotels either are in receivership already or will be soon. Once they are sold by receivers, the debt associated with the hotel may also be wiped out or lessened.
The Burlington hotel, he said, was bought for more than €250 million and sold for just more than €50 million. Such a deal would have entailed a write off of a large amount of the original debt.
“The debt burden has probably been significantly reduced by transactions, whether by NAMA selling or banks selling.”
However, the alleviation of a debt burden will have a lot to do with what type of hotel you own. For the Burlington, it’s not a problem to find a buyer who is interested in the underlying business.
The same may not be true for hotels around the country.
“Places like Dublin City Centre are doing well, but places where a huge resort-type hotel may have been built could be struggling.”
“You would certainly have a tougher situation trying to attract investors for hotels in a rural setting than an urban one.”
And the best way to avoid repeating the mistakes of the past, according to Travers?
The development of a hotel should be demand driven, and in order to get finance, a strong case would have to be made.
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