Tackling Debt. Hotel Leela: Asset sales hold the key

Hotel Leelaventure (Hotel Leela), one of India’s best known luxury hotel chains with eight marquee properties across the country, has had its back to the wall for some time now. This is primarily because of the high debt on its books, which has made interest costs balloon. The company hopes to tackle this through property sales and an asset-light strategy involving management contracts.

It’s been nine quarters now since Hotel Leela last posted a profit. Its debt has risen sharply from less than ₹1,000 crore in March 2007 to nearly ₹5,000 crore now. The interest cost of ₹502 crore in 2013-14 was more than twice the operating profit for the year. With its net worth shrinking on account of heavy losses over the past two years, Hotel Leela’s debt-to-equity ratio has worsened to six times from just about one time in March 2007.

How did this happen? Two factors went against the company — debt-fuelled expansion, and the slowdown after the 2008 financial crisis which took a toll on demand. Explaining the reasons for the debt squeeze, Vivek Nair, Chairman and Managing Director, Hotel Leelaventure, said: “It was after the Lehman Brothers crisis, when the stock market crashed, that the debt problem started for us. Buying land during the Commonwealth Games to build hotels also added to debt levels.”

The last few years after the global financial crisis in 2008-09 have been forgettable for the Indian hospitality industry. Buoyed by the good run prior to the crisis, many players including Hotel Leela went into expansion mode. Of the six properties it owns and manages, three — Udaipur (2009), New Delhi (2011), and Chennai (2013) — started operations after 2008. Expansion at Hotel Leela’s Bangalore property also happened in 2008. So, of the company’s current capacity of 1,619-owned rooms, about half came into operation in the last five-six years. While this helped Hotel Leela establish a wider presence across the country, the timing went bad.

Along with the supply of rooms, depreciation and interest cost rose fast. On the other hand, an insipid economy meant that demand in the hospitality industry did not keep pace. Ergo: Occupancy levels, especially in the business segment, slipped and average room rentals dropped. Caught in the pincer of rapidly rising costs and slow revenue growth, Hotel Leela started floundering.

As part of its fight-back strategy, Hotel Leela sold its Kovalam property for ₹500 crore in August 2011. But it continues to operate the property under a management contract — through this ‘asset light’ model, the company does not own/only partly owns the hospitality properties, but manages them under its brand name for a fee. This helps avoid big-ticket capital expenditure. The management contract approach was first adopted by Hotel Leela in 2009 for a property in Gurgaon, and it plans to walk this path for future growth.

Hotel Leela was referred for corporate debt restructuring (CDR) in early 2012; as part of this, the promoters infused ₹165 crore. The company also sold its IT park in Chennai for about ₹170 crore in February 2013, and shelved plans to open new hotels in Pune and Hyderabad. The company’s plans to raise about ₹1,000 crore through qualified institutional placement (QIP) have not materialised so far. Also, talks earlier this year to obtain a bridge loan from PE firm KKR fell through.

Almost ₹4,000 crore of the nearly ₹5,000 crore debt on Hotel Leela’s books as on June this year was under CDR with 17 lenders. Of these, 14 lenders with exposure of nearly ₹3,850 crore have assigned their dues to JM Financial Asset Reconstruction Company recently. With this, Hotel Leela has exited from the CDR.

Going forward, the company intends to deleverage through monetisation of its non-core assets. These include sale of office space next to its Chennai property, joint development of real estate on its Pune and Bangalore lands, and sale of land in Hyderabad.

Also, Hotel Leela is reportedly looking to sell majority stake in its Delhi and Chennai hotel properties for about ₹1,850 crore, and could tie-up with sovereign wealth funds. “In the past, we had raised funds through the QIP and foreign currency convertible bonds and now we will be tapping sovereign wealth investors to bring equity,” said Vivek Nair.

All said, the company needs to get its act together and fast. The recent June quarter loss of ₹175 crore, up from ₹149 crore in the same period last year, highlights the urgency of the situation. A silver lining is that if the economy improves, as expected, room occupancy levels could increase and tariffs could head higher — this will provide the company more leg-room.

(With inputs from

Purvita Chatterjee)

This is part of a series on how companies are managing debt to gear up for better times.