American hotels are worried about foreclosing as the novel coronavirus leaves most of the country on lockdown, and franchisees of the most recognized names in accommodation are turning to the nation’s central bank for help.
With few people checking into hotels, the American Hotel and Lodging Association (AHLA) is projecting a 60% to 80% decline in revenue for the remainder of 2020. The concern: that hotels will be unable to work with their commercial mortgage servicers to make their debt payments, thus triggering a wave of defaults.
One possible lifeline: the Federal Reserve’s forthcoming Main Street Lending Program, which would offer four-year loans to large borrowers with up to $5 billion in revenue or 15,000 employees.
Wyndham Hotels and Resorts (WH) said Tuesday that its franchise network of about 9,300 hotels, including brands like the La Quinta and Super 8, could turn to the Fed’s program to weather the plunge in occupancy rates. The company said occupancy rates had fallen as low as 22%, during the week of April 11.
Rates that low are problematic for a company that estimates its breakeven point to be 30%. Still, Wyndham CEO Geoffrey Ballotti told analysts Tuesday morning that loans and programs like the Paycheck Protection Program — which provides forgivable loans to small businesses — will allow the company to survive at an even lower breakeven point.
“The passage of the Main Street Lending act could be another big support,” Ballotti said in an earnings call. “We believe our franchisees have ample liquidity and support.”
The Fed’s program was not passed through a specific act, but it will be supported by $75 billion of equity investment appropriated by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Fed plans on levering up that equity into $600 billion of loans.
Wyndham franchisees have already tapped into the PPP; the company says 95% of its franchisees had already applied for a PPP or an emergency disaster loan. About 80% were actually approved for one or both loans, meaning that prolonged stress will force franchisees to turn elsewhere for help.
The Fed’s program, however, is not yet live.
Default would be ‘disastrous’
The AHLA had warned that the PPP would not be enough, and specifically called on the Fed to create a backstop to the commercial mortgage-backed securities experiencing stress due to the wave of forbearance and other loan modifications.
In mid-April, the hotel lobby asked the Fed to set aside a $10 billion fund to take on CMBS debt payments in exchange for loans with 2% interest and a 10-year amortization schedule.
“Widespread default and foreclosure on hotel CMBS debt would be disastrous for the commercial real estate market at large as well as the holders of that debt, including pension plans and other large investors,” the AHLA wrote.
With all types of industries asking the Fed for help, the central bank expanded the scope of its Main Street Lending Program on April 30 to cover larger companies. Those loans are shorter in duration (four years) and more expensive (LIBOR plus 3%) than the terms proposed by the AHLA.
The accommodation industry is arguing that its scale makes it a critical part of the economy to save. The AHLA estimates that 70% of hotel employees have been laid off or furloughed, which is about 1.6 million people.
“We’re one of the largest industries in terms of percentage of GDP, one of the largest employers, so all of the unemployment, that’s a lot of our industry,” Hilton (HLT) CEO Christopher Nassetta told Yahoo Finance on April 25. “And so the faster we recover, the faster we put these people back to work.”
Cheesecakes and Oil
Since the Fed unveiled its Main Street program, several other industries have disclosed interest in taking a loan.
Energy companies feeling the pinch from plummeting oil prices have also expressed interest. In regulatory filings, oil rig servicer Ranger Energy (RNGR) and home heating oil distributor Star Group (SGU) both disclosed that they were exploring their eligibility.
Other companies, such as the Cheesecake Factory (CAKE) and Dave & Buster’s (PLAY), have already amended credit agreements with lenders to give themselves the wiggle room to take a Fed loan if they choose to do so.
Fed Chairman Jerome Powell said April 29 that the Main Street facility can be adapted as needed.
“We’re going to keep at that for some time, I think, adding in sectors and lending products,” Powell said. “So, I think we'll probably be continuing to work and expand Main Street for some time.”
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.