Private credit and hotels: why fund liquidity pressure could disrupt refinancing, capex and acquisitions

By Roberto Necci

At first sight, the issue appears to concern only international financial markets: several major private credit funds have received redemption requests exceeding their quarterly limits and have therefore restricted, deferred or spread part of those investor withdrawals over time.

In reality, the implications extend directly to the hotel investment market.

Over the past decade, private credit has become an essential source of capital for acquisitions, refinancings, renovations, recapitalisations and real estate transactions that do not easily meet the stricter requirements of traditional bank lending.

The central question is therefore not simply whether investors will be able to redeem their holdings quickly.

For the hospitality sector, the decisive question is different:

What happens to hotels when funds need to preserve their own liquidity and reduce their capacity to originate new loans?

The answer is straightforward: credit does not disappear, but it becomes more selective.

And when credit becomes more selective, the divide between financeable and unfinanceable hotels can widen very quickly.

What is happening in the private credit market

Private credit consists of loans provided directly by specialist investment funds to businesses, without necessarily relying on conventional bank financing or publicly traded bonds.

The market has expanded for two main reasons.

On one side, institutional investors, insurers, pension funds and family offices have sought higher returns than those available from traditional fixed-income investments.

On the other, businesses have increasingly required financing that is more flexible, faster and more tailored than the solutions generally offered by banks.

The model works when the duration of the capital raised by a fund is aligned with the maturity of the loans it originates.

The problem emerges when a fund invests in unlisted and relatively illiquid loans that cannot easily be sold, while allowing its investors to request periodic redemptions.

If redemption requests increase at the same time, the fund manager may have three main options:

• use available liquidity reserves;

• sell part of the portfolio, potentially at a discount;

• enforce the redemption limits already contained in the fund documentation.

The analysis published by Assodigitale highlights precisely this mismatch: medium- to long-term illiquid loans on one side, and investors able to request the return of their capital more frequently on the other.

This is not necessarily a crisis, but it is a liquidity test

The expression “withdrawals blocked” may sound excessively alarming.

In many cases, funds have not suddenly or arbitrarily suspended payments. They have applied contractual redemption limits that had already been disclosed to investors, such as a maximum percentage of shares redeemable during any given quarter.

That distinction matters, but it does not remove the underlying risk.

The most important indicator is not simply the amount of redemptions ultimately paid.

It is how funds adjust their future behaviour.

When redemption pressure increases, fund managers may decide to:

• maintain larger liquidity buffers;

• slow new loan originations;

• reduce leverage;

• increase credit spreads;

• focus only on the strongest assets;

• require more equity from sponsors;

• decline transactions that might have been financed only a few months earlier.

For the hotel market, this behavioural shift matters far more than the temporary deferral of individual investor redemptions.

Why private credit has become essential to hotel financing

A hotel is not simply a property.

It is simultaneously:

• a real estate asset;

• an operating business;

• a capital-intensive investment;

• an enterprise exposed to seasonality, reputation, distribution and management quality;

• an asset requiring continuous maintenance, renovation and repositioning expenditure.

The acquisition price is therefore only one part of the overall capital requirement.

Many hotel transactions also require funding for:

• renovation works;

• mechanical and electrical upgrades;

• energy-efficiency improvements;

• furniture, fixtures and equipment;

• pre-opening costs;

• operating losses during the ramp-up phase;

• the introduction of a new brand;

• the replacement of the operator;

• property conversions;

• the refinancing of existing debt.

Banks are generally more comfortable financing stabilised hotels with proven earnings, moderate leverage, a credible sponsor and a clearly documented real estate value.

Private credit becomes particularly relevant when a transaction is more complex:

• temporarily closed hotels;

• assets requiring repositioning;

• properties with significant capex requirements;

• acquisitions requiring speed and execution certainty;

• challenging refinancings;

• business plans that have not yet stabilised;

• recapitalisations;

• value-add or special-situations transactions.

That flexibility comes at a cost.

Alternative financing may involve higher margins, entry and exit fees, tighter covenants, cash sweeps, additional security, restrictions on shareholder distributions and relatively short maturities.

The risk does not necessarily emerge when the loan is originated.

It often emerges at maturity.

The real issue is the refinancing gap

The main risk for hotel owners is not that every private credit fund will suddenly stop lending to the sector.

The more realistic scenario is a reduction in available leverage.

A lender that might previously have advanced 65% of the asset value may now stop at 55%. A fund that would once have financed part of the renovation programme may require the owner to fund a significant share of the capex with additional equity.

The difference between the debt reaching maturity and the amount of new financing actually available is the refinancing gap.

A practical example

Consider a hotel with:

• an estimated asset value of €30 million;

• €19 million of debt reaching maturity;

• original leverage equal to approximately 63% of value;

• €3 million of capex required over the following two years.

In a supportive lending market, a new lender might accept a 60% loan-to-value ratio and provide approximately €18 million.

The owner would therefore need to cover:

• a €1 million shortfall on the existing debt;

• €3 million of capex;

• the fees and expenses associated with the transaction.

The new equity requirement would already exceed €4 million.

If the credit market became more conservative and the incoming lender stopped at 50% of value, the new debt would fall to €15 million.

The owner would then need to secure:

• €4 million to repay the existing loan in full;

• €3 million to fund the capex programme;

• additional capital for fees, interest and transaction costs.

The total equity requirement could approach €8 million.

Without access to that liquidity, the owner would be left with a limited number of alternatives:

• bringing in a new shareholder;

• selling an equity stake;

• raising preferred equity;

• obtaining mezzanine financing;

• selling the property;

• leasing out the hotel operating business;

• selling the asset while retaining the management contract;

• restructuring the debt;

• disposing of the hotel from a weak negotiating position.

This is why even a seemingly modest reduction in loan-to-value can fundamentally alter the outcome of a hotel transaction.

When a fund protects its liquidity, the hotel loses refinancing capacity

The key point is this:

When a fund needs to protect its own liquidity, the hotel loses part of its ability to refinance.

This can affect even an operating hotel that appears financially sound.

A property may generate positive EBITDA, but not enough to support the new cost of debt.

It may have a valuable real estate component, but require renovation expenditure that the incoming lender is unwilling to finance.

It may report growing revenue, but convert too little of that revenue into cash flow.

It may perform strongly during peak season while failing to generate sufficient annual cash flow to remain comfortably within covenant limits.

Lenders do not assess only revenue or the theoretical value of the building.

They assess the asset’s ability to:

• generate cash;

• cover interest expense;

• repay principal;

• fund ongoing capex;

• withstand a downside scenario;

• preserve value over time.

How tighter credit affects hotel valuations

The availability of credit directly influences the sustainable value of a hotel.

The price an investor can pay does not depend solely on EBITDA or the quality of the real estate.

It also depends on:

• the amount of debt available;

• the cost of that debt;

• the required amortisation profile;

• the return expected by equity investors;

• the capex required after acquisition.

When leverage falls, the investor must contribute more equity.

When debt costs rise, the net return generated by the transaction declines.

If the required return on equity also rises, the maximum sustainable purchase price falls.

This pressure may become particularly severe for hotels acquired on the basis of:

• projected EBITDA that has not yet been achieved;

• aggressive valuation multiples;

• outdated property valuations;

• overly optimistic growth assumptions;

• underestimated capex;

• future refinancings treated as automatic;

• exceptional occupancy or average daily rate levels assumed to be permanent.

A credible hotel valuation must therefore integrate at least four components:

1. real estate value;

2. normalised operating profitability;

3. required capex;

4. the financeability of the transaction.

The hotel investment and management guides published on RobertoNecci.it provide further analysis of hotel valuation, profitability, operations, governance, contracts and long-term value protection.

Which hotels are most exposed

Greater selectivity in lending will not affect every asset in the same way.

Stabilised hotels with prudent leverage, efficient operations and verifiable cash flow should continue to access financing.

The greatest risks are concentrated in several specific categories.

Hotels with bullet loans approaching maturity

When most or all of the principal must be repaid at maturity, the continuity of the investment depends heavily on the availability of a new lender.

Hotels acquired with high leverage

A decline in valuation or loan-to-value may force the owner to contribute new equity even where the existing loan has been serviced correctly.

Hotels undergoing renovation

Construction delays, cost inflation and postponed openings may create additional funding requirements precisely when lenders are becoming more conservative.

Hotels performing below the business plan

EBITDA below forecast weakens the debt service coverage ratio, reduces debt capacity and undermines the credibility of the refinancing strategy.

Hotels with operational weaknesses

A strong property cannot indefinitely compensate for weak hotel management.

When credit tightens, the following factors become decisive:

• management quality;

• cost control;

• market positioning;

• reputation;

• distribution strategy;

• direct-booking generation;

• workforce organisation;

• management accounting and reporting.

In such situations, changing the capital structure alone is not enough.

Operating performance must also be addressed.

NecciHotels.it specialises in hotel management and repositioning, connecting operating performance, organisation, reputation and long-term asset value.

Why the Italian hotel market is particularly vulnerable

In many Italian hospitality businesses, real estate ownership, hotel operations and family wealth are closely intertwined.

There is not always a clear distinction between:

• the value of the real estate;

• the value of the hotel operating business;

• operating-company debt;

• property-level debt;

• maintenance expenditure;

• repositioning capex;

• cash flow available for debt service;

• the financial needs of shareholders.

This overlap may remain hidden during periods of growth.

When the financing reaches maturity, all the underlying weaknesses can surface at once.

The issue is not simply the need to pay a higher interest rate.

The owner may discover that:

• the debt cannot be refinanced in full;

• the asset is worth less than expected;

• the required capex exceeds available resources;

• EBITDA cannot support the new financing cost;

• there is no longer enough time to implement an alternative strategy.

These situations require extraordinary transactions: debt restructuring, the introduction of new investors, an asset sale, a business lease, separation between ownership and operations, an operational turnaround or the introduction of alternative capital.

Investhotel.it supports hotel businesses in value-enhancement strategies and extraordinary transactions, including restructurings, investor searches, special situations and the redesign of industrial and financial structures.

Tighter credit will also create new opportunities

Every period of increased credit selectivity creates two markets.

The first consists of assets that can no longer support their existing debt structure.

The second consists of investors capable of acting with capital, operational expertise and decision-making speed.

Opportunities may include:

• acquisitions ahead of debt maturity;

• recapitalisations;

• preferred equity transactions;

• joint ventures;

• discounted debt acquisitions;

• loan-to-own strategies;

• the entry of industrial operators;

• value-add acquisitions;

• property sales with management retained;

• restructurings through new lease or hotel management agreements.

Capital is not abandoning the hotel sector.

It is becoming more selective.

High-quality assets, credible sponsors and business plans built on verifiable data should continue to attract funding.

Hotels with excessive leverage, fragile forecasts, unfunded capex or weak governance may instead be forced to accept more expensive terms or pursue extraordinary transactions.

What hotel owners should do now

Waiting until the debt reaches maturity is the most serious mistake an owner can make.

Hotel owners should assess in advance:

• how much debt can realistically be refinanced;

• the current value of the property;

• the value of the hotel operating business;

• the capex required over the coming years;

• the cash flow genuinely available for debt service;

• the DSCR under a conservative scenario;

• how much new equity may be required;

• the alternatives between sale, lease, management and refinancing;

• the impact of lower revenue or higher costs;

• the time required to complete an extraordinary transaction.

Presenting top-line revenue to a lender is not enough.

A credible financing package requires:

• normalised EBITDA;

• forward-looking cash flow;

• a complete debt analysis;

• a detailed capex plan;

• an independent asset valuation;

• an operational assessment;

• a realistic business plan;

• a fallback strategy if the refinancing cannot be completed.

Private credit is not the problem. It is the signal

Private credit will continue to play a major role in hotel financing.

It responds to a genuine need: providing flexible capital to transactions that the traditional banking system cannot or does not wish to finance.

But flexibility does not mean unlimited availability.

Redemption pressure reminds the market that alternative capital:

• is not always liquid;

• is not always valued through transparent market pricing;

• can rapidly reduce its new lending capacity;

• cannot be assumed to remain automatically available at maturity.

For hotel owners, the message is clear:

The right time to analyse the debt is not after the loan has already matured. The right time to value the hotel is not when the lender asks for additional equity. The right time to prepare an extraordinary transaction is not when the liquidity has already run out.

Does your hotel have debt approaching maturity, unfunded capex or a financing structure that may not be refinanceable?

HotelManagementGroup.it integrates hotel valuation, financial analysis, management control, real estate value enhancement, hotel operations, restructuring and support for extraordinary transactions.

Do not wait for the lender to determine:

• the value of your hotel;

• the amount of equity you must contribute;

• the terms you must accept;

• how much time remains to make a decision.

Contact info@investimentialberghieri.it now.

We will assess the value of the asset, the sustainability of the debt, the capital requirement and the viable alternatives between refinancing, new investment, operational turnaround and sale.

When credit tightens, prepared owners negotiate from strength. Those who act too late negotiate under pressure.

Roberto Necci - r.necci@robertonecci.it