Landlords of UK budget hotel operator Travelodge say shareholders – including Wall Street giant Goldman Sachs – are attempting to engineer a cramdown plan that could see rents owed to landlords cut back dramatically, potentially by making use of new insolvency legislation being brought in to help businesses affected by the coronavirus pandemic.
“This is sharp practice from Travelodge,” said Ben Rose, a partner at Cooper Rose Real Estate which is advising Combined Property Control Group, the landlord for five Travelodge hotels.
"They are effectively trying to do a CVA [company voluntary arrangement] without actually implementing one. They are attempting to frighten smaller landlords into signing up to new and long lasting rent reduction agreements."
Like many businesses impacted by the coronavirus lockdown, Travelodge has refused to pay its second-quarter rents due on March 25. Under emergency legislation landlords are unable to evict tenants until the end of June, giving the business some breathing space to find a rescue plan.
Travelodge, also backed by New York hedge funds GoldenTree and Avenue Capital, has already furloughed most of its workers and is now proposing a solution to curing its rent arrears. This would basically see some landlords take as much as a 50% cut in their future rental payments.
Rents due to owners of more popular hotels are being left untouched, while other properties fall in between these extremes under a proposal which puts the 580 hotels into three different pots. Travelodge asked its landlords to sign up to the plan by May 21, but has not yet said what the take-up has been.
TAKE BACK CONTROL
There is a catch. Those who sign up to the plan also have to agree to waive their rights to take back control of their buildings in the event of a subsequent missed rental payment or similar event of default, such as an administration or reorganisation of the business.
The most likely way such an event could occur is through a CVA. These allow owners of businesses to propose restructuring of debt and other payments, such as rents, if at least 75% of creditors, by value, agree.
If they agree to the plan, therefore, landlords would be unable to take control of their properties if Travelodge then implemented a CVA – a step that would in part be decided by holders of its senior secured bond, a £440m 2025 floating-rate note paying Libor plus 5.375%, as those holders would be included in any creditor vote.
This note was issued last year in a deal underwritten by Goldman Sachs and Barclays. Several landlords have said that the bond, which in March was trading at as low as 62 pence in the pound, is still mainly held by Goldman and its fellow shareholders – giving rise, the landlords say, to a conflict of interest.
IFR could not confirm who held the bonds. Goldman, GoldenTree and Avenue all declined to comment, as did Travelodge.
CONSENT IS KEY
Travelodge has said that if landlords don’t sign up to its rent reduction plan, it could activate a CVA anyway. And last week the bondholders gave consent for the company to pursue either a CVA or a restructuring plan under new insolvency legislation to be introduced next month.
Under the new legislation a company can put a solution to creditors, rather like the US Chapter 11 process, that can be forced on all of them if the court approves and “at least one impaired class of creditors has voted in favour of the plan”. The bonds are impaired and bondholders have already given their consent.
Even if that new approach is not followed, a CVA is also likely to pass in order to implement the rent reductions. The bondholders may provide enough votes to carry a CVA, since under those rules the landlords' proportion of the votes is scaled back to reflect just a year’s rent due rather than total rent liabilities under the lease agreements of £2.56bn (a number that reflects their average length of 23 years). Travelodge’s annual rent bill at £260m is smaller than the par value of the bonds.
In addition, the company’s latest accounts for the first quarter show that Travelodge’s investors have also provided a £115m loan to the company at an eyewatering 15% interest rate as well as a new £60m super-senior revolving credit facility, so far undrawn. These creditors could also vote in any restructuring plan, squeezing out the votes of landlords.
Combined Property Control Group challenged Debenhams’ CVA last year and managed to establish that such proposals could not nullify the basic right of landlords to forfeit an agreement with a tenant should rent not be paid.
Rose said this meant CVAs were no longer such a threat as they had been in the past. For instance, Travelodge landlords might find demand from other hotel chains, such as Whitbread’s Premier Inn, Hilton or Accor, for the buildings as alternative tenants.
“Under a CVA each hotel has to receive market rent or above. They cannot just be put into three broad brackets. Travelodge are being aggressive in trying to impose this,” said Rose.
Travelodge’s largest tenant is Prestbury Group, which has 123 hotels across each of the brackets. Several other landlords have agreed to work with Prestbury. The enlarged group has come up with an alternative rent reduction plan which is less severe. It is yet unclear if a compromise has been reached. Prestbury declined to comment.