This issue of the Journal of Corporate Renewal is focused on hotels and hospitality, including restaurants, none of which are newcomers to distress. The extreme headwinds of the past few years have left these businesses vulnerable, requiring the ability to remain nimble and strategic in the face of uncertainty.
This month, we examine where we are today, what have we learned, and what does the future hold given the state of the global economy. The articles included this month are informative and future-looking and provide in-depth analysis and thought-provoking themes.
Though one might think the pandemic’s devastating impact on hotels would have resulted in a surge in bankruptcies, Alan Tantleff and Zahara Kassam of FTI Consulting explain that in addition to the massive amounts of federal stimulus that kept many businesses afloat, including hotels, “bankruptcy remote” financial structures and springing recourse provisions required by lenders are major deterrents to hotels filing for Chapter 11. Despite the relatively low numbers of bankruptcy filings, those cases represent only a small portion of the out-of-court restructurings that are underway in the industry.
Robert J. Gayda and John Patouhas of Seward & Kissel LLP review five notable hotel Chapter 11 bankruptcies that have been filed since the start of the pandemic in search of lessons that can be applied going forward. They note that there is no universal solution to these cases, as each one presents unique circumstances. Given the headwinds of the current environment, they suspect that more such cases will be surfacing in the coming months.
Richard J. Shinder of Theatine Partners writes that hotels and hospitality properties located in central business districts are part of the same ecosystem as commercial office space, and their performance is highly correlated with office occupancy rates. He notes that with companies continuing work-from-home policies put in place during the pandemic or adopting hybrid work schedules in which employees report to offices only a few days a week, many market participants are expecting an increase in distressed commercial real estate, including in the hospitality space.
Though the travel and hospitality sectors were among the hardest hit businesses as a result of global pandemic-mandated shutdowns, some may be surprised to learn how significant the uptick in business was when COVID-19 restrictions began to ease. Matt Beresh and Nathan Klepacki of Accordion take us through the lessons that hospitality executives should take to heart from that period, bearing in mind the need to be nimble and disciplined.
Like their counterparts in the United States, Canadian hotels endured tremendous financial stress during the pandemic, which was lessened to some degree by the financial support provided by governmental entities. But facing supply chain challenges, higher interest rates, and inflationary pressures, the industry remains under stress. Jason Arbuck, Shayne Kukulowicz, and William Onyeaju of Cassels in Toronto provide an informative article on the Canadian insolvency regime and how hotel licenses and management agreements are treated.
Gary Lembo of Paladin outlines how inflation and the Fed’s attempts to reign it in could lead to a recession with unintended consequences that could be severe for the restaurant and hospitality industry. He points out that a number of restaurants have already revised downward their outlooks for the year. Following spending sprees as the pandemic shutdowns eased, consumers are now spending less, particularly in discretionary areas. Lembo says it remains to be seen how deep and prolonged a potential recession might be and therefore how big of an impact the current economic uncertainty will have.
