[THAME] The travails of a British chain of cheap hotels during the pandemic have pitted thousands of savers and retirees invested in the real-estate funds that own its branches against Wall Street titans.
Travelodge Hotels, a familiar brand to travelling salesmen and thrifty tourists across the UK, counts hedge funds Avenue Capital Group and Goldentree Asset Management as well as Goldman Sachs Group among its owners.
This week, following a collapse in revenue during the Covid-19 lockdown, the company started proceedings to cut its rental bill up to December 2021 by 38 per cent as part of a financial overhaul in which shareholders will provide £100 million (S$176.5 million) of new debt and equity.
That's bad news for Travelodge's landlords, many of which are real-estate investment funds popular with pensioners, because they pay regular dividends backed by rental income.
They have until June 19 to secure a better deal, when they and other creditors vote on whether to approve the proposals under a UK procedure known as a Company Voluntary Agreement (CVA).
Officials at Avenue Capital, Goldentree and Goldman Sachs declined to comment on the CVA.
"There are the bones of a structure here but it is still asking a huge commitment from landlords," said Viv Watts, the leader of the Travelodge Owners Action Group which represents dozens of smaller landlords. "It could be workable if they are willing to engage with us which they haven't been until now."
The landlords are short on bargaining power, however. If they refuse the rent cuts, under special measures enacted by the UK government to limit economic damage from the coronavirus, they can't evict commercial tenants at least until the end of June. Even if they could, finding a new tenant in the midst of a recession would be a challenge.
One landlord, Secure Income Reit, estimates the proposed CVA will result in a short-term reduction in rent of £23 million, equivalent to a total of 10 months' rent spread for two years across its 123-hotel Travelodge portfolio.
The fund, backed by property tycoon Nick Leslau, was at the forefront of landlords' rejection of an earlier proposal for rent cuts without financial contributions from Travelodge's shareholders.
Another owner of 12 Travelodge hotels, LXI Reit, expects a 4.6 per cent hit to its total rent in the financial year ending March 2021 under the proposals.
Both property owners said they are considering the latest CVA proposal.
Landlords may argue that Travelodge's latest plan transfers too much of the pain from Covid-19 shutdowns onto them.
Rival budget chain Premier Inn Hotels, owned by Whitbread Plc, raised money to see it through the crisis by issuing equity - placing the burden on its owners.
"Whitbread paid their quarterly rent without fail and without question. They did an equity raise that will have hurt shareholders but it protected creditors who know they will pay their rent even in the middle of the worst crisis to hit the sector," said Mr Watts. "In this case the savers and pensioners are being asked to subsidise the shareholders."
Travelodge said its latest proposals take into account feedback from landlords and amount to the most effective way to secure the future of its more than 10,000 employees.
While the UK lockdown that started in late March will probably deliver a £350 million hit to sales this year, Travelodge's CVA plan rules out hotel closures and the rent reductions are not permanent, it said in a statement. A representative for the firm declined to comment further.
"The alternative for landlords could have been site closures," said Julie Palmer, a partner at insolvency specialist firm Begbies Traynor. "A rent cut is not ideal but other options could be worse."
The rent cuts amount to £144 million - equivalent to 2 per cent to 3 per cent of the total due under the remaining lease, according to Travelodge. "Shareholder support", meanwhile, meanwhile, adds up to £240 million, the company said, including existing cash and use of a credit line that was already in place as well as the £60 million of lending and as much as £40 million additional capital pledged for the CVA.
Travelodge will also provide landlords with a share of future earnings if they exceed a pre-determined threshold.
But the plan imposes a bigger burden on some landlords than others, argues Mr Watts of the Travelodge Owners Action Group. While 94 per cent of hotel properties will receive at least half the rent due to them over the period affected by the plan, 6 per cent of the portfolio, comprising hotels that are unprofitable or likely to lose money in future, will receive no rent, according to Travelodge.
"They have created a new category of landlord that won't be offered any income for nine months this year and the whole of next year," said Mr Watts. "It is substantially worse for some landlords than their first proposals."