| Schloss Bangalore Private Limited | ||||
| Rating reaffirmed at 'CRISIL A- / Negative' | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its 'CRISIL A-/Negative' rating on the long-term bank facilities of Schloss Chennai Pvt Ltd (SCPL; part of the Schloss group).
On July 26, 2021, S&P Global Ratings downgraded its rating on Brookfield Property Partners LP (BPY), the parent of SCPL, to ‘BBB-/Stable’ from ‘BBB/Negative’ on account of sustained elevated leverage. The rating action follows the pandemic-induced weakening of the operating environment for retail and office properties of BPY, which account for around 90% of its revenue. S&P Global Ratings believes secular headwinds in the retail and commercial space would decelerate the pace of recovery and key credit metrics of BPY are unlikely to return to pre-pandemic levels in the next two years.
CRISIL Ratings has applied its parent notch-up criteria for arriving at the rating of SCPL. While SCPL’s credit rating remains unaffected by the S&P Global Ratings action on BPY at present, CRISIL Ratings will closely monitor any further rating action or change in the outlook on the debt facilities of the parent.
The rating factors in the weak industry outlook and moderation in the performance of the Schloss group due to the Covid-19 pandemic. The continued negative outlook reflects the likelihood of deterioration in the business risk profile as hotel occupancy is expected to remain subdued in the near term.
The business risk profile of the Schloss group was impacted by travel restrictions resulting in a steep decline in occupancy during the first wave. This affected the credit quality and liquidity position of the group. Post lifting of lockdowns, occupancy had started to pick up, but was much lower than the pre-pandemic level. However, with the second wave breaking out in April 2021 and many states resorting to localised lockdowns, occupancy suffered again during the first quarter of fiscal 2021. As the impact of the second wave abates and with easing of travel restrictions from June 2021, occupancy has started picking up. During this entire period, Brookfield, has extended operational and financial support through regular equity infusions to meet financial obligations and by implementing its global best practices resulting in significant cost-savings.
SCPL has taken measures to shore up its liquidity by opting for moratorium on interest payments during March-August 2020. Lenders have subsequently converted this accrued interest into a term loan as permitted by the Reserve Bank of India, with repayment commencing only after the original loan is repaid. Lenders have also sanctioned additional working capital limits and disbursed term loan of Rs 90 crore under Emergency Credit Line Guarantee Scheme (ECLGS) to aid liquidity and address temporary cash flow mismatches. SCPL is also eligible to draw down additional term loan of up to Rs 90 crore under the ECLGS, which will further cushion liquidity once availed.
Additionally, the company has taken numerous cost control measures resulting in savings of Rs 10-15 crore per annum which enabled it to break even at the operational level in months prior to the second wave. These savings are expected to continue over the medium term as well.
Strong subsequent waves of the pandemic resulting in lockdowns can result in deterioration in the credit profile of the company and its affiliates. On the other hand, a faster reversal to normalcy may contain the extent of deterioration. However, the ability of the business to revert to operational stability, improvement in industry outlook and timely support from the sponsor when needed will be key monitorables.
Before March 2020, the Schloss group had healthy occupancy of over 60%. However, the occupancy has fallen steeply in the wake of the pandemic, which mirrors the trend across premium hotels in the country. The management has taken proactive steps to curtail operating cost. That said, occupancy was below the expectation of CRISIL Ratings in the first half of fiscal 2021. While there was some recovery in the second half of fiscal 2021 with occupancy rising following relaxation in restrictions, the second wave of the pandemic will delay recovery.
Sub-par occupancy across the special purpose vehicles (SPVs) in the Schloss group have led to significant impact on operating profitability in the current fiscal and resulted in operating loss of around Rs 80 crore in fiscal 2021. However, the group received support from the sponsor during fiscal 2021 with equity infusion of over Rs 100 crore to fund operational losses and debt obligations.
With subsequent pick-up in operations and availability of working capital limit, liquidity has improved and is adequate to meet any debt obligation in the near term.
If the situation deteriorates, the group is likely to augment its liquidity through support from its sponsors - BSREP III (Brookfield Strategic Real Estate Partners III), a fund floated by Brookfield and BPY.
CRISIL Ratings will closely monitor the operating performance and impact on the group’s financial risk profile over the next few months.
The rating continues to reflect the presence of a strong sponsor, BPY, and a competent management that has extensive experience in the real estate and hospitality segments. In addition to financial support, BPY has provided operational support that has enabled cost savings. These benefits are likely to continue over the medium term. Furthermore, profitability is gradually expected to improve, driven by growth in revenue per available room (RevPAR) and cost rationalisation measures by Brookfield since the acquisition.
The rating also reflects the support available from Brookfield to meet any shortfall in debt servicing during the initial years, presence of an obligor structure and liquidity support through creation of a debt service reserve account (DSRA) and corporate guarantee for a total quantum of Rs 300 crore over the entire tenure of the loan.
These strengths are partly offset by average financial risk profile and exposure to risks related to cyclicality and seasonality in the hospitality industry. |
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 rating of the individual SPVs to that of the group. The six SPVs are SCPL, Schloss Bangalore Pvt Ltd (SBPL; 'CRISIL A-/Negative'), Schloss Chanakya Pvt Ltd (SCHPL; 'CRISIL A-/Negative'), Schloss Udaipur Pvt Ltd (SUPL; 'CRISIL A-/Negative'), Schloss HMA Pvt Ltd (SHPL) and Leela Palace and Resorts Ltd (LPRL). All the entities are collectively referred to as the Schloss group.
All the SPVs have business linkages, common management and 100% fungibility of funds. Each SPV acts as co-obligor to the others. Post debt servicing in each SPV, excess cash flow is available for debt servicing of all other SPVs.
CRISIL Ratings has also notched up the rating assigned to the group to factor in strong managerial, business and financial benefits of Brookfield being a sponsor through BPY. CRISIL Ratings has also noted the corporate guarantee (for a total quantum of Rs 300 crore) provided by Brookfield to the lenders of the Schloss group for meeting any shortfall in debt servicing or fund requirement over the tenure of the debt.
Furthermore, CRISIL Ratings has treated the compulsorily convertible debentures (CCDs), carrying 10.5% coupon, as equity given the expectation that they will be subordinated to external debt and the principal (along with accrued coupon payments) will stay in the SPVs till the external debt is fully paid off.
Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths
The Schloss group is spearheaded by Brookfield’s highly experienced senior management team. Brookfield has significant experience in the hospitality space, with about USD 13 billion of hospitality assets under management globally (275 hotels totalling about 44,000 keys). Brookfield has successfully turned around hospitality assets globally and the senior management has significant experience in managing hotels.
Brookfield will draw on its global expertise to turn around the properties in India. Furthermore, its financial ability to support the investment has also been taken into account, given its long-term horizon and criticality of the investment.
The transaction is Brookfield’s first hospitality investment in India. Acquisition of the Leela brand will allow the sponsor to leverage it and expand its presence nationally
Leela is an established brand in the luxury hotel space with presence in key Indian markets, which have high entry barriers and are strategically important. Presence in prime locations has helped these properties attract both leisure and business demand.
Given the strong brand position, these properties have maintained occupancy and average room rentals higher than the industry average over the past three years.
With the presence of a co-obligor structure, surplus cash flow after debt servicing in any SPV will be available to fund shortfall in others, thus supporting the consolidated debt service coverage ratio (DSCR). Liquidity, equivalent to three months of principal and interest obligation, shall be maintained from the end of the fourth year (fiscal 2023).
Besides, the long-term debt has a ballooning repayment structure with only 1% due over the first three years and around 25% due over the subsequent five years, giving ample time for the properties to stabilise operations under the current management. Furthermore, while the DSCR is expected to be modest in the initial years, fresh equity or CCDs of up to Rs 300 crore will be available to cover any shortfall in debt servicing during the entire tenure of the debt. The corporate guarantee provided by Brookfield to the lenders provides additional comfort. Ability of BSREP III to provide support in the initial years, when operations may take some time to stabilise, enhances liquidity and financial flexibility.
The group has initiated several cost-cutting measures across its properties to reduce operational losses and has achieved break-even in recent months, despite low occupancy.
Brookfield has brought in its global experience of operating premium hotel properties to improve the Schloss group’s operating efficiency. Redistribution of employees to managed properties to reduce excess staffing, reskilling of employees, central renegotiation of service and supply contracts across all the properties for better terms are some of the initiatives undertaken. These initiatives are expected to result in permanent cost saving of Rs 40-45 crore across the SPVs.
Weaknesses
The hospitality sector is susceptible to downturns in the domestic and international economies. Business destinations are more sensitive to macroeconomic factors. For example, growth in 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, RevPAR of premium hotels declines more sharply during downturns, in comparison to mid-sized or economy hotels, but operating cost remains high. Thus, cash flow from these properties is more susceptible to downturns.
Before their acquisition by Brookfield, the performance of the Leela properties had weakened over the five fiscals through 2019 due to shrinking marketing spends, funding constraints for maintenance of properties, as well as increasing overheads. As a result, growth in occupancy and room rental was significantly lower than that of peers in each of the micro-markets.
Post-acquisition by Brookfield in fiscal 2020, the occupancy and profitability were expected to improve, given the initiatives taken by Brookfield to improve operational performance. While the performance improved initially, leading to higher profitability till February 2020, the pandemic-induced lockdowns impacted occupancy in fiscals 2021 and 2022. Nonetheless, steps taken by the management and Brookfield are likely to benefit as the operations ramp up.
Consolidated debt is estimated at Rs 3,024 crore as on March 31, 2021. There are nominal principal obligations till fiscal 2022. With recovery from the impact of the pandemic likely to be delayed, ramp-up in cash flow is expected to be pushed back. However, support from Brookfield is expected in the interim. DSCR is projected at 1.10-1.20 times over the next eight years, which will keep the financial risk profile average in the medium term.
Gearing is expected to remain high over 1.5 times over the next few years. Debt protection metrics will remain subdued, with interest coverage ratio (excluding interest on CCDs) expected at 1.0-1.2 times.
The cushion in debt servicing may erode in later years given the higher quantum of debt repayment from the eighth year. However, the overall debt burden in later years could be significantly lower as Brookfield plans to deploy surplus cash generated each year towards prepayment of debt. Also, the risk of refinancing appears to be limited, given the valuation of the properties and the potential to generate healthy cash flow in the long term. |
Liquidity: Adequate The group’s liquidity is adequate driven by need-based equity support from the sponsor, and sanction of term loan of Rs 90 crore (in SCPL) under ECLGS and working capital limit by lenders of working capital limit of Rs 100 crore which was utilised just 20% on average over the 6 months through June, 2021. On a standalone basis, each of the SPVs (except SHPL) has moderate liquidity with expected DSCR of around 1 time. However, deferment of interest on the term loan facility for six months and its subsequent conversion to a term loan as permitted by the RBI with back-ended repayment has provided some respite. SCPL Furthermore, the surplus liquidity available with the SPVs will be deployed to support debt servicing. SCPL is also eligible to draw down additional Rs 90 crore of term loan under the ECLGS which will further cushion liquidity once availed. Liquidity is also aided by the need-based funding support expected from Brookfield (through BPY) throughout the tenure of the loan. |
Outlook: Negative CRISIL Ratings believes the Schloss group's credit risk profile will continue to remain weak because of the long-lasting impact of the pandemic, uncertainty owing to threat of future waves of the pandemic and the resultant travel restrictions affecting occupancies and overall delay in recovery to pre-pandemic levels. |
Rating Sensitivity factors Downward factors
Upward factors
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About the Company SCPL is one of the six SPVs incorporated in 2019 for Brookfield’s acquisition of real estate assets from Hotel Leela Ventures Ltd (HLVL) housing the Leela Palace, Chennai, a luxury hotel with 321 rooms. SCPL is 100% owned by Brookfield through its fund BSREP III, wherein Brookfield and its fully owned subsidiary, BPY, are the anchor investors.
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. |
Key Financial Indicators
*SPVs started operations in October, 2019. |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||
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Criteria Details
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