| Schloss Chennai Private Limited | ||||
| Rating Reaffirmed | ||||
| Rating Action | ||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||
| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its rating on the long-term bank facilities of Schloss Chennai Private Limited (SCPL) at ‘CRISIL A-/Stable’.
SCPL is a special purpose vehicle (SPV) formed by Brookfield Strategic Real Estate Partners III fund (BSREP III) to acquire The Leela Palace, Chennai.
The rating continues to factor healthy business risk profile with improvement in occupancy and average room rent (ARR). Occupancy and ARR for the Schloss Group have reached to ~65% and ~Rs 14,800 respectively in first nine months of fiscal 2023 as compared to ~42% and Rs 10,700 over the previous year corresponding period.
The Group reported revenue of ~Rs 622 crore and earnings before interest, taxes, depreciation and amortisation (EBIDTA) margin 43.7% in the first nine months of fiscal 2023 which is materially higher than the last year before the impact of pandemic where the numbers stood at ~Rs 280 crs and 18.4% respectively.
The improvement is in line with CRISIL estimates and the revenue and EBIDTA margin in current fiscal 2023 and fiscal 2024 is expected to remain strong. Increased corporate travel, meetings, incentives, conferences and exhibitions (MICE) activities as well as healthy leisure demand have been the primary drivers of the growth. Going forward, increasing international travel, which forms an important part of the Group portfolio, will continue to support the performance in fiscal 2024.
The ratings, however, remain constrained by sizeable debt, modest leverage as well as coverage indicators of the Group. Healthy improvement in these parameters will remain a monitorable going forward.
The rating also continues to reflect the presence of strong sponsors (BAM/BPY) who have competent management with extensive experience in the real estate and hospitality segments. The rating also factors in financial and operational support from Brookfield.
The rating reflects the strong Leela brand in the hospitality segment and presence of diversified pool of assets. These strengths are partly offset by leveraged financial profile due to presence of high long-term debt and large debt obligation of the same and exposure to risks related to cyclicality and seasonality in the hospitality sector. |
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 ratings of the individual SPVs to those of the group. The six SPVs are SCPL, Schloss Chanakya Pvt Ltd (SCHPL; rated 'CRISIL A-/Stable'), Schloss Udaipur Pvt Ltd (SUPL; rated 'CRISIL A-/Stable'), Schloss Bangalore Pvt Ltd (SBPL; rated 'CRISIL A-/Stable'), 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 fungibility of funds.
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 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 until the external debt is fully paid off.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths:
Before their acquisition by Brookfield, the performance of the Leela properties had weakened over the five fiscals through 2019 because of 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 disruptions caused by Covid-19, the company’s revenue has recovered and grown well supported by healthy business as well as leisure demand. The recovery in ARRs and occupancy indicate favourable demand-supply dynamics for hospitality sector in India. The profitability improved because of cost-efficiency measures implemented by Brookfield post acquisition. With revival in domestic travel, the group is expected to clock revenue of Rs 900-1,000 crores and EBIDTA margin of ~45% in fiscal 2023. Going forward, the operating performance is expected to improve further which will result in significant expansion of operating profits and consequently bring the leverage down.
Leela is an established brand in the luxury hotel space and has 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 as well as business demand.
Given the strong brand position, these properties have maintained occupancy and average room rentals higher than the industry average. Further, Brookfield owns 100% shareholding in the Schloss SPVs and has entire control in the group. As this is the first hospitality investment of Brookfield in India, it has continued to support SCPL by extending operational support, sharing global expertise in managing properties and providing need-based financial support to meet cash flow mismatch.
The Group owns and operates 4 hotels and manages another 12 hotels under the six consolidated entities, which provides healthy asset as well as geographic diversification. The SPVs will maintain fungibility of cash flows. Liquidity, equivalent to three months of principal and interest obligation, shall be maintained from fiscal 2023.
Besides, the long-term debt has a ballooning repayment structure with only 1-3% due over the first three years and around 25% due over the subsequent five years, giving time for the properties to stabilize operations. Also, the corporate guarantee provided by Brookfield to the lenders provides additional comfort. Ability of BSREP III to provide need-based support provides liquidity and financial flexibility.
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 revenue per available room (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 in light of the pandemic. Besides, RevPAR of premium hotels declines more sharply during downturns in comparison with mid-sized or economy hotels, but operating cost remains high. Thus, cash flow from these properties is more susceptible to downturns
The consolidated debt is estimated at Rs 3,569 crore as on March 31, 2023 resulting in high leverage as modest debt coverage indicators. improvement in operating performance and healthy accruals is expected to improve the leverage going forward and hence remains a key rating sensitivity. The debt coverage indicators are also expected to improve gradually over the near to medium term.
Ballooning debt repayment starting from the second half of fiscal 2023 coupled with repayment of the emergency credit line guarantee scheme loan will keep the debt service coverage ratio (DSCR) modest over the medium term. However, cash surplus of around Rs 350 crore as on Feb 28, 2023, will support debt servicing over the medium term, in addition to accruals from regular business activity. Additionally, support from Brookfield is expected as and when needed.
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. |
Liquidity: Adequate The group’s liquidity is adequate with cash surplus of around Rs 350 crores as on Feb 28,2023 which will be sufficient to pay its debt obligations over the near term. Liquidity is also aided by the availability of working capital limit of Rs 50 crore, which was utilised at 65% on average in the last 12 months. Furthermore, the surplus liquidity available with the SPVs will be deployed to support debt servicing. Need-based funding support from Brookfield is expected to continue throughout the tenure of the loan. |
Outlook: Stable CRISIL Ratings believes that Schloss group’s business risk profile will continue to benefit from sustained improvement in occupancy and ARR, coupled with premium positioning of the respective hotel in the geographies. The financial risk profile is expected to remain modest, though need-based support from Brookfield will be forthcoming. |
Rating Sensitivity factors Upward factors
Downward 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, which houses The Leela Palace, Chennai, a luxury hotel operating with 325 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- Consolidated
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
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 Bank Lenders & Facilities | ||||||||||||||||||||||||||||
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This Annexure has been updated on 24-Mar-23 in line with the lender-wise facility details as on 06-May-22 received from the rated entity.
Criteria Details
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