Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A-/Positive’ rating on the long-term bank facilities of Schloss Bangalore Ltd (SBL; a part of the Schloss group).

 

SBL is a special-purpose vehicle (SPV) formed by Brookfield Strategic Real Estate Partners III fund (BSREP III) to acquire The Leela Palace Bengaluru (in Karnataka).

 

The company had filed a draft red herring prospectus (DRHP) for a Rs 5,000 crore initial public offering (IPO) on September 20, 2024. As per the DRHP, the company will be raising Rs 3,000 crore through a primary issuance and offer Rs 2,000 crore worth of shares for secondary sale. The secondary sale would be done by the promoter, Project Ballet Bangalore Holdings (DIFC) Pvt Ltd.

 

The continuation of the outlook reflects the expected improvement in the financial risk profile of the company, driven by expected equity infusion of Rs 3,000 crore after occurrence of IPO, which would be utilised for pre-repayment of debt of Rs 2,700 crore (as mentioned in the DRHP). This is expected to bolster the capital structure and improve the debt protection metrics, especially interest coverage ratio, over the medium term.

 

Consolidated revenue stood at ~Rs 1,226 crore and earnings before interest, taxes, depreciation and amortisation (Ebitda) margin was 48.9% in fiscal 2024, against ~Rs 903 crore and 46.9%, respectively, in fiscal 2023. Occupancy and ARR (average room rent) for the Schloss group grew to ~67% and ~Rs 20,966, respectively, in fiscal 2024 (~67% and ~Rs 17,248 crore, respectively, in fiscal 2023).

 

The operating performance is expected to improve over the medium term, driven by the robust domestic leisure and business travel owing to strong economic activity and traction in international travel.

 

The rating continues to reflects the strong strength of the Leela brand in the hospitality segment and presence of a diversified pool of assets. These strengths are partially offset by the susceptibility of revenue and profitability to cyclicality in the hospitality industry and a leveraged capital structure. However, it should improve after the IPO and consequent repayment of debt. This will remain monitorable.

Analytical Approach
CRISIL Ratings has combined the business and financial risk profiles of six SPVs, in line with its criteria for rating entities in homogeneous groups, and has equated the ratings of the individual SPVs to those of the group.

 

The six SPVs are SBL, Schloss Chanakya Pvt Ltd (SCHPL; 'CRISIL A-/Positive’), Schloss Chennai Pvt Ltd (SCPL; 'CRISIL A-/Positive’), Schloss Udaipur Pvt Ltd (SUPL; 'CRISIL A-/Positive’), Schloss HMA Pvt Ltd (SHPL), Leela Palaces and Resorts Ltd (LPRL) and Tulsi Palace Resort Pvt Ltd (TRPL). All the entities are collectively referred to as the Schloss group.

 

All the SPVs have business linkages, common management and fungibility of funds.

 

CRISIL Ratings has also notched up the rating assigned to the group to factor in the strong managerial, business and financial benefits of the Brookfield group.

 

CRISIL Ratings has further noted the corporate guarantee (for Rs 300 crore) provided by BSREP III to the lenders of the Schloss group for meeting any shortfall in debt servicing or fund requirement over the tenure of debt. CRISIL Ratings notes that the compulsorily convertible debentures were converted into equity in July 2024.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy operating performance and reputed brand in the luxury hospitality segment with strong sponsor providing operational and financial support: Leela is an established brand in the luxury hotel space and operates in key Indian markets, which have high entry barrier and are strategically important. Presence in prime locations helped these properties attract both leisure as well as business demand.

 

Given the strong brand position, these properties have maintained healthy occupancy and ARR. Consolidated revenue stood at ~Rs 1,226 crore and Ebitda margin at 48.9% in fiscal 2024, against ~Rs 903 crore and 46.9%, respectively, in fiscal 2023. The operating performance is expected to improve, driven by the robust domestic leisure and business travel owing to strong economic activity and traction in international travel.

 

Furthermore, Brookfield owns 100% shareholding in the Schloss SPVs and has full control over the group. As this is the first hospitality investment of Brookfield in India, it is likely to continue supporting the group by extending operational support, sharing global expertise in managing properties and providing need-based financial support to meet any cash flow mismatch.

 

• Diversified portfolio of assets with fungibility of cash flow: The group owns and operates five hotels and manages another 6 under the six consolidated entities, which provides healthy assets as well as geographic diversification. The SPVs will also maintain fungibility of cash flow. However, it might be noted that ~29% and 24% of revenue comes from the Leela Palace Bengaluru and The Leela Palace Chanakya (in New Delhi), respectively.

 

The corporate guarantee provided by Brookfield to the lenders gives additional comfort. Furthermore, ability of BSREP III to provide need-based funds aids financial flexibility.

 

Weaknesses:

• Exposure to cyclicality in the hospitality industry: The hospitality sector is susceptible to downturns in the domestic and international economies. Growth in revenue per available room (RevPAR) in business destinations is more sensitive to macroeconomic indicators, such as nominal growth in gross domestic product. On the other hand, leisure destinations are more sensitive to non-economic factors such as terror attacks and health-related travel warnings, as seen during the pandemic. Besides, the RevPAR of premium hotels declines more sharply during downturns in comparison with mid-sized or economy hotels, but operating cost remains high. Thus, cash flow from these properties may remain vulnerable to economic downturns.

 

• Moderate financial risk profile: Consolidated debt stood at ~Rs 4,052 crore as on May 31, 2024, resulting in high leverage and modest debt coverage indicators. However, the financial risk profile is expected to significantly improve after equity fund raise of Rs 3,000 crore, of which Rs 2,700 crore is expected to be utilised for debt reduction.

Liquidity: Adequate

Cash surplus was ~Rs 353 crore as on May 31, 2024. Also, Brookfield (sponsor) has infused pre-DHRP funding of Rs 1,193 crore to support future growth. Need-based funding support from Brookfield is expected to continue throughout the tenure of the debt.

Outlook: Positive

The business risk profile of the Schloss group will continue to benefit from sustained improvement in occupancy and ARR, coupled with premium positioning of the respective hotel in the geographies. The financial risk profile is expected to improve over the medium term, driven by expected equity infusion and the consequent bolstering of the debt protection metrics.

Rating sensitivity factors

Upward factors:

• Improvement in the financial risk profile, with interest coverage ratio increasing to above 3.5 times
• Significant reduction in debt through prepayment

 

Downward factors:

• Material changes in support philosophy of the Brookfield group towards the SPVs
• Moderation in occupancy or ARR
• Cash and equivalent dropping below Rs 175-200 crore without commensuration of debt

About the Group

The Schloss group comprises SBL, SCHPL, SCPL, SUPL, SHPL LPRL and TRPL. These SPVs were initially owned by Brookfield through BSREP III, a fund floated and managed by Brookfield Asset Management. On May 31, 2024, SBL obtained control over these SPVs from BSREP III. The SPVs are set up for Brookfield’s acquisition of real estate assets from Hotel Leela Ventures Ltd at various destinations.

 

SBL was incorporated in 2019 to acquire The Leela Palace Bengaluru, a luxury hotel operating with 357 rooms.

 

SCHPL was established in 2019 to take possession of The Leela Palace Chanakya, a luxury hotel operating with 254 rooms.

 

SCPL was incorporated in 2019 to purchase The Leela Palace Chennai (in Tamil Nadu), a luxury hotel operating with 325 rooms.

 

SUPL was established in 2019 to acquire The Leela Palace Udaipur (in Rajasthan), a luxury hotel with 80 rooms.

 

About the sponsor fund

BSREP III, the fund through which the investment is being done, has a fixed tenure of 10 years (with an option for two one-year extensions) with investments typically happening in the first four years.

Any other information: Not Applicable