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The Last Resort

Andrew Coutts

Definition: A lender of last resort is an institution willing to extend credit when no one else will. The term refers especially to a reserve financial institution, most often the central bank of a country, intended to avoid bankruptcy of banks or other institutions deemed systemically important or too big to fail.

It is part of British culture to enjoy a “play on words”. Although these are not humorous times for the Portuguese world of resorts and the hospitality/tourism-based real estate sector, the necessary restructuring of many businesses is beginning.

The 2000–2008 period witnessed a frenzy of interest and activity in hotel and resort real estate. Development sites were acquired ignoring the “location-location-location” principle, projects were conceived by often novice resort developers and their inexperienced architects, and substantial “investment” was made, in the majority of cases by Portuguese financial institutions.

This all happened in a vacuum that assumed that the normal economic/business cycle had for some reason been suspended and that demand and values would continue “ad infinitum” to increase.

The 2008-2012 period has been very painful for all of the players in our sector, big and small. It is not just that values stopped increasing or even decreased in most regions; it is that primarily real estate demand, temporarily we all hope, simply evaporated.

As a consequence, the development community has fled to other Portuguese speaking markets; “traditional” developers have stopped developing and existing investors are unable to debt fund the projects.

The current challenge is how to cope with this “holding period”? How to use the time wisely while we wait for the pick-up in the market that may be around the corner?

Behind the scenes, financial institutions, both old and new, have been preparing and are now  acting to financially restructure the balance sheets and debt structures of a number of high profile companies. This is manifesting itself in a number of different ways, for example:

a) Campo Real golf resort (near Torres Vedras) – administration/liquidation. Now ongoing for more than one year under judicial administration and likely to result in the hotel being sold to an investment fund, international consortia or possibly the original owner;

b) Hilton As Cascatas Vilamoura. The last asset of Imocom Group that is now controlled by the investment fund management company ECS Capital and continues to be managed by Hilton;

c) Vigia Group, owners of the Parque da Floresta resort. The majority of the group’s property companies are in judicial administration;

d) Pinheiros Altos, the Dona Filipa Hotel, São Lourenço golf course and the Penina resort. The original bank consortia debt is now the responsibility of ECS Capital;

e) The Carlos Saraiva – CS Group with a number of resort hotels in the Algarve. The banks and investment funds are currently analysing its strategic future.

Are there new investors coming into the market? Not yet, but there are new owners with a different profile, skill-set, financial engineering capacity and investment return criteria. Are these new owners or lenders of last resort? Yes and no.

Private equity funds/asset management firms, for example ECS Capital and the newly created Discovery Fund belonging to Explorer Investments, have a longer term investment return.  They are confident in their ability to turn around an operating business and identify value in the company’s asset are being attracted to the sector.

These companies have corporate finance, asset management and financial control in their genetic code. If only this set of skills, considerable intellect and profile of capital had been married to hotel and resort developers philosophy, and practise originally.

The relationship between these investment funds and their management teams and the banking sector is creating a positive restructuring environment at least at a financial and corporate level. Debt is effectively being turned into an equity position and thus, sooner or later, ownership and management control.

The next challenge and critical path step is leveraging on this solid foundation and resourcing knowledgeable management into the business in today’s new world of the unknown, with low levels of confidence, weak source markets, competitive destinations and changing consumer behaviour.

Product innovation, dynamic packaging, partnering, innovative and knowledgeable operating/management solutions, distribution into new markets and embracing the culture of today’s new consumer will be critical success factors for a new DNA of management that will be required in the post 2012 period.

Andrew Coutts [email protected]

Andrew Coutts is owner and CEO of the ILM Group, established in Portugal since 1999. ILM specialises in the tourism sector and resort real estate development advisory services and management.