What would break this financing?
A fictional hotel borrows to refurbish. Move the four things that most often go wrong and watch whether its earnings still cover the loan. This is the test a lender will run; a sponsor should run it first.
An illustration with a fictional hotel and simplified figures. It is not a model of any real project and not financial advice. It runs in your browser; nothing is sent.
- Loan when repayments begin
- US$17.65m
- Annual debt service
- US$1.95m
- Lowest cover, years 2 to 8
- 0.91× in year 2
- Years below the 1.20× covenant
- 1 of 7
- Cash the sponsor must find
- US$0.77m
Meets the covenant Below it
Show the figures as a table
| Year | Cover | Covenant |
|---|
How to read it
Cover is the hotel’s operating earnings divided by the year’s loan payments. Below 1.0, earnings do not meet the payments and the sponsor must fund the gap. Between 1.0 and 1.20 the loan is paid, but the lender’s covenant is breached. A moratorium that ends before the hotel earns, or one long enough to add a great deal of interest to the loan, can each do harm. Year 1 is the refurbishment.
Fixed assumptions
- Loan of US$16.5m over 15 years, repaid in equal monthly instalments after any moratorium
- 120 rooms at an average US$210 a night; other revenue a further 35% of room revenue
- Occupancy of 55%, 62% and then 68% in the first three years after opening
- Fixed costs of US$3.0m a year; variable costs 30% of revenue; US$0.6m a year while closed
- Twelve months of refurbishment; no tax, inflation or refinancing
The same hotel appears in a worked example of a board paper, which sets out these results for a decision.
Test your own venture before someone else does.
The firm builds models a client’s own team can run, with the downside in the body of the paper rather than an appendix.