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Financing for hotels: Project Finance vs. Project Bonds

Financing for hotels: Project Finance vs. Project Bonds

The diversity, complexity, rigidity of supply and elastic demand are economic and financial charateristics that diferentiate the hotel business from other industries. And this, of course, also impacts when developing a hotel project, because a significant capital investment is required. Therefore, when financing hotel projects, developers must carefully consider the options available. Two common approaches […]

The diversity, complexity, rigidity of supply and elastic demand are economic and financial charateristics that diferentiate the hotel business from other industries. And this, of course, also impacts when developing a hotel project, because a significant capital investment is required.

Therefore, when financing hotel projects, developers must carefully consider the options available. Two common approaches are Project Finance and Project Bonds. In this article, we will explore both options and their advantages for the development of hotel projects.

Project Finance as a financing mechanism for hotel projects

Project Finance is a financing approach in which resources are obtained specifically for an individual project, in this case, a hotel. It is characterized by having the hotel’s own cash flow as its only guarantee. That is, instead of relying on a parent company’s balance sheet, the project is financed with its own assets and future cash flows. This is the difference between this financing method and the more traditional ones.

When this type of financing for hotel projects is well executed, it will be sufficient to pay the debt obtained.

Project Finance during the last decade has been widely used in countries such as the United States, Australia, Spain, Italy and Great Britain. Especially in renewable energy projects, public infrastructure, commercial and hotel projects, telecommunications, oil installations and gas pipelines.

This structure has several advantages for the development of hotel projects.

Advantages of Project Finance for hotel projects

Greater control. In Project Finance, the project promoters retain greater control over the ownership and management of the hotel. This can be essential to maintaining the original vision of the project and making operational decisions.

Flexibility in the capital structure. This method offers flexibility in terms of capital structure. Well, promoters can customize the terms and conditions of financing according to the needs of the hotel project, using a combination of debt and equity.

Personalization. Each hotel project is unique, so customization is essential, especially when it comes to differentiating yourself from the competition. In this sense, Project Finance allows complete customization of the financing structure. That is, the terms of the loan can be specifically adapted to meet characteristics such as size, location, market segment, among others.

Disadvantages of Project Finance for hotel projects

Financial responsibility. A disadvantage of Project Finance is that the debt incurred must be assumed by the parent company or the project promoters. This increases financial responsibility and personal risk.

Expensive mechanism. On the one hand, it generates greater financial responsibility as we saw and on the other, it is a financing mechanism that generates high levels of debt.

Warranty requirements. Lenders or sponsors often require personal guarantees or mortgages on assets of the parent company as collateral. This can increase financial burden and risk exposure.

Project Bonds as a financing mechanism for hotel projects

Project Bonds are another way to obtain financing for large hotel projects. They are characterized by being fixed income bonds where the interest and principal debt are paid with the cash flows of the hotel establishment.

This type of financing also offers an opportunity for institutional investors to participate in hotel projects. Well, they will be able to do it through listed assets.

These bonds are generally issued in the capital market and sold to institutional investors, such as pension funds and insurance companies. Below, we explore its advantages and disadvantages in the context of hotel projects.

Advantages of Project Bonds for hotel projects

Investment diversification. Project Bonds attract institutional investors looking for long-term investments. This can diversify funding sources and reduce reliance on a single lender.

Less exposure to risks. The issuance of Project Bonds allows the risks of the hotel project to be separated from the parent company. This means that the parent company is less exposed to project-specific risks, such as those related to construction or hotel demand.

Favorable interest rates. If the hotel project has a strong credit rating, favorable interest rates may be obtained in the bond market. This can result in a lower financing cost.

Disadvantages of Project Bonds for hotel projects

Less control. The issuance of Project Bonds involves ceding part of the control of the project to the bond investors. The terms and conditions of the bonds may include contractual restrictions that limit the flexibility of the project promoters.

Issuance costs. Issuing bonds can entail significant costs in terms of legal and investment banking fees. This must be taken into account when evaluating the financing structure.

Comparison and choice for hotel projects

The choice between Project Finance or Project Bonds for hotel projects depends on several factors such as the financial structure, objectives and preferences you have for your project. Project Finance offers greater control and flexibility in the capital structure, but with greater financial responsibility. Project Bonds diversify financing sources and reduce risk exposure, but may involve less control and issuance costs.

Ultimately, it is important that you have hotel, financial and legal advisors. Well, professional help will allow you to identify the option that best suits your hotel project. On the other hand, when seeking financing it is necessary that you have a very clear business and financial plan. At IHCS we can support you with our experience and professionalism to develop a good hotel business plan.

Each project is unique, and the choice of financing must be in line with the goals and vision of the hotel brand. With the right financing structure, the development of hotel projects can be a financial success and a valuable contribution to the tourism sector.

Conclusion

The development of hotel projects requires careful consideration of the financing options available. Both Project Finance and Project Bonds are valid approaches that offer specific advantages and disadvantages. When evaluating which is the best option, it is essential that you analyze the needs of your project, your financial structure and your objectives. The right choice of financing can be essential to the long-term success of your hotel project.

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