Calder Point Hotels Limited: refurbishment financing
From the managing director, for decision
1Decision requested
The board is asked to authorise management to negotiate on the basis of the lender’s revised term sheet, subject to the three conditions in section 7, and not to sign any instrument until those conditions are met and counsel has reviewed it.
2Background
The company proposes to refurbish its 120-room hotel, closing for twelve months. The lender’s first term sheet of 3 March Draft offered US$18.0m at 7.5%. Its revised term sheet of 2 May Proposed offers US$16.5m at 6.75% over 15 years, with a 12-month moratorium during which interest is added to the loan, and a covenant that earnings cover debt service at least 1.20 times.
Neither term sheet binds the company. The revised sheet replaces nothing; it is the lender’s current proposal.
3The facts relied on
| Statement | Status | Source |
|---|---|---|
| Refurbishment cost of US$19.2m | Reported | Contractor’s estimate, 14 April; not a fixed price |
| Sponsor equity of US$3.0m | Committed | Shareholder letter, 20 April; not yet received |
| Planning consent | Executed | Permit issued 11 February |
| Lender’s credit approval | Reported | Stated by the lender’s officer on a call; not in writing |
| Occupancy of 55%, 62%, then 68% | Modelled | Management’s plan, against 61% before closure |
4Sources and uses
Uses: refurbishment US$19.2m. Sources: loan US$16.5m and sponsor equity US$3.0m, a total of US$19.5m. The margin for cost overruns is US$0.3m, under 2% of cost. Interest added to the loan during the moratorium, about US$1.15m, is not drawn in cash; repayments begin on a balance of US$17.65m.
5Options
6The downside
On the lender’s terms, earnings cover debt service 0.91 times in the first year of trading, 1.22 the next and 1.49 thereafter. If the hotel opens six months late and occupancy runs ten points below plan, cover is 0.18, 0.81 and 1.07 in those years and settles at 1.19: the loan is paid, but the covenant is never met. The sponsor would have to find US$2.6m to cover the shortfalls, against US$0.8m in the base case.
A 24-month moratorium does not cure this. In the same downside, cover settles at 1.06, because the interest added to the loan raises every later payment.
7Recommendation
Option 3. Negotiate on the revised terms, provided that:
- the lender agrees in writing that the covenant is first tested in the second year of trading;
- the sponsor funds a debt-service reserve of US$2.6m, in cleared funds, before the first drawdown;
- the refurbishment is let on a fixed-price contract with a completion date and damages for delay.
If the sponsor cannot fund the reserve, management recommends option 4.
8What would change this recommendation
- A fixed price materially above US$19.2m, which would exhaust the contingency.
- Written credit approval on different terms from the term sheet.
- Forward bookings that support, or contradict, the occupancy assumed.