Lebanon’s hospitality and tourism industry is in crisis management mode when it comes to dealing with its finances. As the number of tourists visiting the country has steadily declined, down 8.7 percent in January and 17.8 percent in February compared to the first two months of 2013, companies in the sector are running out of cash.
“The definition of good has changed,” laments Ziad Kamel, treasurer of the Syndicate of Owners of Restaurants, Cafés, Night-Clubs and Pastries in Lebanon and owner of Couqley’s and Gemmayze’s Alleyway. “Good used to mean you’re doing an acceptable margin, you’re paying out dividends regularly and you’re making money from your business. Today, good means you’re not in the red.”
Running out of cash
Different businesses have been put under different financial pressures by the Syrian crisis. In the domain of high-end hotels, businesses face slightly less pressure if they are owned by groups who can afford to continue injecting funds in them, at least until Lebanon’s tourism sector recovers from the crisis. Those who own the real estate can usually continue running and investing in the hotel without resorting to loans.
Two such cases are the Hilton Beirut Habtoor Grand Hotel and the Hilton Beirut Metropolitan Palace in Sin Al Fil, both owned by prominent United Arab Emirates businessman Khalaf al Habtoor, chairman of the UAE-based Al Habtoor Group, which also owns several Dubai hotels. While the two Lebanese properties are able to cover operational costs from their revenues, the investments to bring the two hotels fully up to the Hilton international brand standard are coming out of the pocket of the owner, according to Cluster General Manager Naif Zureikat who is tasked with keeping the hotel at those standards. “It’s a loan-free hotel,” he says.
On the other extreme, some hotels that aren’t operational yet have outright stopped investments. According to Pierre Achkar, head of the Lebanese Hotel Owners’ Association, some investments in hotels have been put on hold. One new investment, a Grand Hyatt project, was stopped to wait for better days.
For many of the remaining hotels in Lebanon that are still operating, but have bigger financial constraints, getting investment is difficult. According to Achkar, it is nearly impossible under these circumstances to find investors ready to buy shares, since their return would be close to zero or negative. In an attempt to find a way to sustain investment through these times, the Lebanese Hotel Owners’ Association has lobbied the government to pass a law making it possible to sell a room or restaurant within a hotel along the model of a “condo hotel,” the profits from which could go back into the business.
On the side of ticketing and tour operators, cash flows have remained stable with the exception of those businesses geared toward incoming tourism, according to Jean Abboud, president of the Association of Travel and Tourist Agents in Lebanon. However, the affected businesses are small, are not faced with repaying loans and could deal with their waning income by downsizing.
Companies in the food and beverage industry have had their cash flows affected adversely, making it difficult to repay loans. According to Khater Abi Habib, chairman of the loan guarantee program for small and medium enterprises Kafalat, there has been a rise in the number of failed loans in the past two years, which, though the numbers are still unaudited, has increased to over 3 percent in the past six months compared with its rate of 1.8 percent in 2011.
The high rate of failure in the industry, exacerbated by the Syrian crisis, has diminished the tourism sector’s drive to take out new loans to finance growth. In the first three months of 2014, Kafalat loans to the tourism sector reached $1.8 million, a 64.5 percent decrease from $5.1 million in the first three months of 2013.
Kafalat has also witnessed an increase in the number of rescheduled loans from their portfolio. Though Abi Habib estimates it is no more than 2 percent, he points out that it is rising. “And I expect it will keep on rising for the next little while,” he adds.
Banks and bankruptcies
For those companies that have taken out loans to finance their businesses, negotiating loans with banks has become part and parcel of the process of running — and closing — a business.
Banks almost universally require personal guarantees from the owners when they are applying for a business loan. “It’s difficult in Lebanon to get a new loan if you don’t own something else to cover it. In the States, if you have idea you can get a loan. Here, you need a personal guarantee,” says Achkar.
For this reason, shareholders of failed businesses often find themselves repaying the loan for years after their company has shut down. Kamel refers to one of his less successful experiences when he and his co-shareholders decided to shut down one of their failing businesses. In 2012, they closed a restaurant that was opened January of that year in Zaitunay Bay. “We opened in January 2012, then [Gulf countries] put the [travel] ban in May. Overnight our revenues decreased by 70 percent. Ever since then, we had a loss every single month,” he says. They were able to renegotiate the terms of the loan, and the shareholders are still personally paying it off.
By having loans guaranteed by personal assets, banks minimize the chance of defaults on loans. Banks will rarely push their clients into bankruptcy, opting rather for negotiations with their clients as they shut down their business. Their supposed lenience comes with a perk: by rescheduling loans, they make some gains on the additional interest that accrues from prolonging the repayment period.
Moreover, in Lebanon the owners of the business cannot file for bankruptcy themselves, according to Elya Haber, managing partner at Haber and Partners Law Firm. And in the unlikely event that their creditors initiate the bankruptcy, the owners of the business would not have a clean state like in the United States. Having a bankruptcy to their name, they would be blocked from many future business transactions such as taking out loans. “To tell the truth, the system of bankruptcy in Lebanon is helping people not go into bankruptcy,” says Haber. Indeed, this system encourages owners of failing businesses to quietly close shop and personally repay the loan.
Living up to its reputation as an active player in the industry, Banque du Liban (BDL), Lebanon’s central bank, is creating measures to help businesses ride out the storm with a modification to a 2001 circular that would let companies reschedule their loans with banks for an extra three to five years.
Last September, BDL passed an intermediate circular amending Basic Circular 80 that subsidized interest on loans to the tourism, agriculture, industry, crafts and technology sectors. This amendment made it possible for banks to reschedule subsidized loans approved by BDL prior to September 2013, for a total of 10 years. The move was designed to alleviate the financial burden on companies until Lebanon reached more economically prosperous times, according to the BDL’s legal department.
Though the time has been extended, the subsidy itself has not been increased, so a company would have to pay the extra interest that will have accrued from extending the time to pay back the loan. The subsidized loan has a minimum amount of LL50 million ($33,000) and maximum amount of LL15 billion ($10 million) or 20 percent of the bank’s capital, with some exceptions if a single economic group invests in different sectors, according to the legal department at BDL.
This is not the first time BDL has issued amendments to weather a storm. Following the 2006 war, the central bank facilitated one-year loans to the tourism industry, which they could even use to cover operational expenses for that limited duration of time. The amendment to reschedule loans is a slightly less drastic move. According to Achkar, there are efforts currently by the Federation of Tourism Associations to lobby the government and BDL to extend operational loans to companies in the tourism industry, which would help with the cash flow of the day-to-day operations. However, this type of loan would be risky to implement if the Syrian conflict and Lebanon’s low prospects for tourism drag on for a long period of time.