The finance landscape in the hospitality industry is under pressure, as businesses continue to find their feet following the pandemic and the fallout from high interest rates takes its toll.
Most instances of loans issued to a business will involve bank covenant reporting imposed on the borrower.
There are variations of commercial loan products, and for some their continuation depends on the results of the reporting.
“Loans are underwritten based on the valuations,” says Ash Rad* – director at chartered accountants NetSurplus.
“The market practice for valuations is a ratio of the net operating profit divided by EBITDA (Earnings Before Interest Taxes Depreciation and Amortisation).”
A valuer is enlisted to provide insights into the business’ risks, and banks lend on this valuation.
“Each lender imposes their own covenants, but EBITDA is the primary driver of the bank’s funding and covenant reporting after the pub gets funded.”
Standard practice is for the operators to report to the bank at least twice annually. Covenants frequently include LVR (Loan to Value Ratio), ICR (Interest Coverage Ratio), and EBITDA. The lender will also require full financial reports at each reporting period, including ATO returns.
The NSW government has been under ongoing pressure to reform the gaming sector and address gambling issues, and this became an election issue in the successful campaign by the now incumbent Minns administration.
A series of election promise reforms have since been applied, and uncertainty in the sector has driven down the value of gaming entitlements in NSW.
However, funding is based on EBITDA, which Rad stresses is a business performance metric using profit and loss, not balance sheet, and the revaluation of gaming licences is not common.
“Even if the gaming licences are revalued and amortised, I don’t see any impact on current covenant reporting as the amortisation is excluded in EBITDA,” he explains.
While the falling value of entitlements may not prompt a re-valuation, reforms will be a challenge for venues that are heavily reliant on gaming. The impact of changes may result in lenders seeing gaming venues as a higher operational risk.
Rad stresses that accurate accounting and reporting are of even greater significance in companies with multiple venues.
“In the case of a Group structure, they will look at the whole structure not just one site, even if the funding is for that one venue.”
*Ash Rad will be a panellist at ClubTIC’s hosting of the Seminar of Hospitality Operations (SOHO), taking place 26 March. [Purchase tickets HERE]
