These days, a good night’s sleep can be hard to come by for a CFO in a precarious industry like the hotel and time-share business. Banks and investors are well aware of the fragility of travel-and-vacation revenues in the current downturn, and capital doesn’t come cheap. Some finance chiefs might feel that the expense of stashing away enough cash to ensure their companies’ survival if their worst-case scenarios come true is too high right now. Not Vasant Prabhu, CFO for Starwood Hotels & Resorts Worldwide, however.
Lately, Prabhu has been busy negotiating a looser leverage covenant on Starwood’s revolving credit line and leading the way as his company pounced on a big bond offering just before issuing its quarterly earnings call. Both moves came at a high cost. But the finance chief believes it was worth it, because, as matters stand now, things would have to get pretty disastrous for the company to run out of cash.
On April 27, Starwood announced that it had increased the maximum debt-to-EBITDA ratio in its revolving loan covenant from 4.5 times to 5.5 times without having to cut the size of the loan. In return, it will pay the banks’ fees and higher interest rates and make other changes to the covenants. At the same time, the hotel company pre-paid a $500 million bank term loan due June 29 by drawing down on the revolver, thus reducing the funds available under it to $1.2 billion.
Just three days after announcing the changes to its revolving loan facility — on the day it issued a first-quarter 10-Q revealing a devastating drop to $6 million in net income compared to $32 million in the same quarter of 2008 — the hotelier announced that it would sell $500 million worth of senior notes due in 2014 at an interest rate of 7.875%.
The offering, finished on May 7, netted the company $474 million. Starwood says it intends to use part of that sum to cut its bank borrowing. Prabhu says he and his colleagues are in talks about securitizing some of the company’s receivables, also in the hopes of paying down debt.
“Our view has been: let’s assume the worst and prepare for it. We want to have no problems whatsoever with liquidity, and we want to have no problems whatsoever with leverage.” Starwood CFO Visant Prabhu
Indeed, having enough cash and the ability to borrow it is of paramount importance in a time of falling revenues. That’s especially true at Starwood, which has been changing its business model over the last six years from a hotelier heavily enmeshed in real estate to one that stresses leasing and managing its properties and burnishing its brand. Up until the downturn, Prabhu was heavily involved in helping his company shed real estate assets.
While that has left it less vulnerable to the current unraveling of property values, it has also meant that the company is picking up less revenue than its peers. For example, revenue for the company fell by 4% in 2008 , according to figures supplied by Capital IQ. In contrast, the average revenue decrease for a group including Starwood and four other comparable companies — Choice Hotels, InterContinental, Wyndham Worldwide, and Marriott — was just 1%.