I am hearing from Bankers and hoteliers that a number of hotels are coming up for bank reviews this next 6 months. What does the review mean?
The bank will review their position on the hotel and be looking at two main areas.
1) Serviceability- Can the Hotel or other businesses owned by the hotelier afford to pay the interest and repayments. At a local QHA meeting Sean Dollar stated that you needed to have net profit coverage between 1.5 to 2 times your interest bills to achieve good interest rates.
2) Asset Backing- If the bank is forced to sell to be able to cover its debts, most business loans will have a valuation clause in the conditions. If the bank requires a valuation it will probably cost you around $5-6,000 minimum for a valuation.
3) The banks are looking at experience and owner awareness as another review point and will sometimes stretch lending criteria if you can demonstrate you know the industry and have good business credentials.
What banks are saying at the moment is that they are aware some of the current loans are going to fail the ideal Asset Backing test, thus the reason they want hoteliers to demonstrate sound Serviceability and awareness of their situation.
If the hotel fails to meet any of the criteria, the banks have the option of liquating the asset or raising the interest rates to take into account the extra risk of the loan.
As I mentioned in an earlier newsletter, be on the front foot with your banker and get an appointment with your business advisor and business banker to sort out any issues before your review point. Remember the business bankers hands are usually tied if you go to them after the review date to raise concerns.
Wayne Patten