Travelodge is asking landlords for rent reductions as part of a rescue deal that will see it jettison nearly 50 hotels, potentially putting 350 jobs at risk.
The budget hotel operator buckled under the financial strain of making repayments on borrowings of £1.1bn which date back to its debt-fuelled takeover by the Dubai International Capital (DIC), the private equity arm of the oil-rich Gulf state, in 2006.
Travelodge’s financial problems mean it has effectively been seized by its three main lenders – Goldman Sachs and two American hedge funds Avenue Capital and GoldenTree Asset Management – with the DIC’s ownership wiped out.
To get the business back on track Travelodge is using a company voluntary arrangement (CVA) which is a legal agreement that enables a company to write off some of its debts. “The impact of the economic downturn on Travelodge’s business has been compounded by a large debt burden and expensive lease arrangements,” said KPMG’s Richard Fleming who is overseeing talks with landlords.
Travelodge does not own its hotels and the rent being paid on a fifth of its 500 properties was “unsustainable” said Fleming, as the terms were agreed struck during the property boom that preceded the 2008 financial crash. To make the numbers add up Travelodge says its needs monthly rents to be reduced by 25%; however, three-quarters of the affected landlords must vote in favour of the plan at next month’s creditors meeting.
“With the support of its lenders, shareholders and landlords, the company will be able to reshape its debt and operational structure to a model more suited to these straitened times,” added Fleming, who said it presented landlords with a better deal than if the company went into administration.
As part of a wider financial restructuring £235m of debt is being written off and £71m repaid, bringing its borrowings down to £329m. The DIC had financed its £675m takeover of the company six years ago by issuing a £480m bond which is also being written off to its cost.
Traveloge is also being given more time to pay off its remaining debts at lower interest rates. The new owners have agreed to pump £75m of new cash into the business, which is the UK’s second biggest budget hotel chain behind Whitbread’s Premier Inn, with the lion’s share to be used to spruce up its hotels.
Travelodge chief executive Grant Hearn said the company was already looking for new operators for the 49 hotels it does not want and “currently envisages no hotel closures or job losses”. “The financial restructuring, including the CVA, will leave Travelodge in a much stronger position going forward and will ensure a long-term, sustainable future for the business,” said Hearn. “This is a successful brand with millions of customers and the company will emerge in excellent shape from this process.”