Leela weighs options to ease debt load

Hotel Leelaventure wants to sell some assets, including its signature property in Delhi, but the plan has been hit by the slowdown in the sector

In May, the share price of Hotel Leelaventure, the luxury hotel company, crashed 15 per cent in just four trading sessions at the Bombay Stock Exchange. The free fall came soon after news spread that the company had terminated negotiations with private equity fund Kohlberg Kravis Roberts, or KKR, for a bridge loan. The loan, reportedly of around Rs 2,000 crore, would have provided some relief to the company which has outstanding obligations of nearly Rs 5,000 crore. Besides saying that the terms of the loan were "not satisfactory", Hotel Leelaventure declined to spell out the details for the breakdown of talks.

Though unconfirmed by the company, reports said that accepting the terms suggested by the New York-headquartered fund would have led to Hotel Leelaventure sharing or even losing ownership of two of its six properties valued at nearly Rs 3,000 crore.

For the company, staying afloat requires urgent injection of funds. For the past 12 quarters, it has failed to generate operational profits even as it paid 65 per cent of its gross profit as interest on loans during the quarter ended March 31, 2014.

Debt free till a decade ago, the company, founded by the late Chittarath Poovakkatt Krishnan Nair (fondly called Capt Nair) in the late 1980s, has announced several corrective measures to pare debt, like sale of land parcels and commercial properties, including a sea-facing property in Kerala. Soon after the breakdown of talks with KKR in May, the company's directors approved a plan to mobilise up to Rs 1,000 crore through issue of equity shares, debentures and GDRs in one or more tranches, in another attempt to lighten the debt burden.

Running short of options

But Hotel Leelaventure has almost exhausted all the means available to it: from being referred to the corporate debt restructuring (CDR) cell of 17 domestic banks and engaging in talks with sovereign funds from West Asia to tapping the shoulder of industrialist Ravi Pillai (who bought Leela Kovalam for Rs 500 crore and renamed it the Leela Raviz).

At least 14 of the 17 lenders, with exposure of about 97 per cent out of the total CDR debt of Rs 4,130 crore, have assigned the debt in favour of JM Financial Asset Reconstruction Company. An upfront payment of Rs 865 crore was made by JM Financial to the lenders in addition to security receipts worth Rs 3,245 crore. However, this is of little relief to the other lenders. Hotel Leelaventure has already defaulted on the payment of interest to Life Insurance Corporation of India for three subsequent quarters since March this year.

A questionnaire sent to the company seeking reasons for the default remained unanswered.

According to the company's annual report, it expected to realise Rs 2,031 crore from sale of its luxury hotel in Chanakyapuri, New Delhi. "However, due to the slowdown in the global and Indian economy and the continued recession in the hotel industry, the company could not sell either the Delhi hotel or any other hotel to meet this obligation," the report said.

Saddled with debt, plans for developing a new hotel on a 6.5-acre plot near the Taj Mahal in Agra have remained largely on paper. It had proposed to build a 100-room luxury hotel in a joint venture there and has already paid Rs 100 crore for the project. A 3.85-acre plot of land at Banjara Hills in Hyderabad is being sold after plans to build a hotel there were shelved. In Pune too, a similar hotel project on an 8.4-acre plot has been replaced with a high-end residential cum commercial property.

Much of the company's woes can be attributed to its refusal to spread its wings beyond luxury hotels, unlike the Tata-promoted Taj Group and ITC Hotels. "Companies like Leela and Oberoi wish to keep their brand associated with luxury. This is primarily because the return on investment is the highest in that segment," explains P R Srinivas, a travel and hotel consultant. While Capt Nair did evince interest in the mid-market segment(Rs 4,000-5,000 per night) under a new brand, Leela Gardens, the company's financial tangles put paid to the plans.

Wrong timing

Homi Aibara, partner, Mahajan & Aibara Consultants, feels that Hotel Leelaventure spent too much when the market was slowing. "It needs to sell one or two asset to get over its financial trouble. Otherwise, its brand is very good, and its service standards are exceedingly good. It's just the financial architecture that needs to be put into place."

Faced with increased competition, the other hotel chains countered the threat by launching lower-category brands. Taj launched Gateway and Vivanta by Taj, while ITC Hotels opened WelcomeHotel and Fortune in different categories. "The step-down brands supplement the top-end brand even though they do not generate as much profit," says Srinivas. "Even with the participation of so many new players in the mid-scale category, it remains a large enough segment to operate in."

Despite its problems, Hotel Leelaventure did better than its rivals last year. Its revenues grew 10 per cent to Rs 718 crore last from Rs 653 crore in 2012-13. In comparison, Indian Hotels Company (owner of the Taj group) and East India Hotels (owner of the Oberoi and Trident hotels) both reported growth of less than 3 per cent. Its average room rates are among the highest in the country. For instance, the 80-room Leela Udaipur at Lake Pichola carried an average price of Rs 21,000 per room per night even at 39 per cent occupancy last year.