(Alliance News) - Safestay PLC on Monday said it is in talks with lender HSBC to obtain another waiver on its debt covenants as it expects to breach these at the next test date of December 31.
Shares in Safestay were down 11% at 12.00 pence in London in late morning trading.
The London-based company, which owns and operates a brand of hostels, obtained a waiver in May on covenants for its GBP22.9 million HSBC debt facility. The waiver was until the end of December.
However, Safestay expects it will breach the historic debt service and historic interest cover covenants at the December test date. It is therefore in talks with the lender for a possible waiver of these covenants at the next test date "and for a longer period thereafter". There is no guarantee such talks will be successful.
Safestay also is pursuing a government-backed loan under the Coronavirus Business Interruption Loan Scheme that would replace the HSBC facility.
As at August 18, Safestay had GBP4.1 million of a GBP5.0 million HSBC overdraft left undraw, meaning it has negative GBP900,000 in cash.
Given its current base case scenario, the company models that it will have negative GBP4.6 million in cash in February 2021, within its GBP5.0 million overdraft facility. However, if its low-case scenario assumptions apply, then it would have a funding shortfall by the end of January.
The base case assumes all hostels re-open by October, with 25% occupancy for August and September, compared to 90% in 2019. It expects this to rise to 30% in the final quarter and 40% in January and Feburary 2021. In 2019, fourth-quarter occupancy was 65%. Safestay also assumes that average occupancy will be 5% lower than in 2019 for the rest of 2021.
The low case assumes all hostels except London Kensington Holland Park and Barcelona Gothic, re-open by October. These two would instead open in 2021. It also assumes 20% occupancy for August and September, falling to 15% in the final quarter on the assumption of a second wave of Covid-19 infection, with 25% occupancy in January and February of 2021.
The low case also assumes average occupancy will be 15% below 2019 for the rest of 2021.
Safestay's hostels break even when average occupancy hits around 57%, the company noted, with both the base and low case suggesting this level will be hit starting from March 2021.
With the addition of the six hostels acquired in 2019 and 2020, Safestay said it foresees a return to 2019 revenue levels in 2021, despite the occupancy drop.
Safestay said it is "investigating alternative options to maintain its cash requirements within the GBP5 million limit pursuant to the overdraft with HSBC".
The firm owns freeholds of hostels in York, Glasgow and Pisa that could be sold or be subject to a sale and lease back agreement.
"The group might also contemplate the early termination of the leases which are anticipated to generate losses in the next months, subject to an agreement being reached with the relevant landlords. The board is considering a range of options in relation to the business, including raising equity, but the board is mindful of giving all shareholders the opportunity to participate in any such equity raise," Safestay said.
It added: "The directors remain confident of securing additional funding to continue to support the business and emerge as one of the winners post the pandemic."
In terms of current trading, Safestay's Berlin hotel reopened in May and its Vienna hostel in June, with all other hostels to have reopened by Friday this week except London Kensington Holland Park and Barcelona Gothic. These will only reopen once there is enough demand to allow profitable operation of more than one London hostel and two in Barcelona.
In July, 30% of Safestay's bed stock was available and 16% was occupied. Average occupancy for its bed stock increased to 24% of available bed stock in the first week of August and 27% in the second.
Under normal circumstances, 28% of Safestay's business is from group bookings months in advance and 72% is from individual bookings made an average of two months in advance. However, the current business is now essentially made up of last minute bookings, making it harder to predict future bookings.
Chair Larry Lipman said: "This is a challenging period but I am confident that in time we will get back to normal. We are working closely on a range of options to strengthen our financial position, which may not be required but will be an additional comfort to have. We know we have a good cash generative business and while the current market is challenging we have a clear strategy for addressing it and as importantly for moving back to being fully operational."
A more detailed trading update will be provided alongside Safestay's interim results on September 24.
By Anna Farley; annafarley@alliancenews.com
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