THERE APPEARS TO be no shortage of examples that reinforce this Government’s ongoing lack of sound business skills. This is evident whether one considers the management of public finances or health and human services or even public transport. So simply add Needham’s Point Holdings Limited to the ever-lengthening list.
Government’s recent guarantee of the $10 million loan for Needham’s Point Holdings for the Barbados Hilton, and approved by Parliament by necessity, therefore raises a national red flag because the action raises a number of questions that require urgent and comprehensive answers. Questions such as:
1. Was the already spent $12 million, which brings the total cost of renovation to $22 million, funded by Needham’s Point Holdings through earnings or was the $12 million disbursed from a previous loan sitting in its bank account?
2. What is the debt service for Needham’s Point Holdings’ investment in Hilton Barbados?
3. Is Needham’s Point Holdings’ gearing (the ratio of the company’s long-term debt compared to its equity capital) too high?
4. Is the owner’s return sufficient to satisfy the debt service, in addition to existing loans and bonds in the name of Needham’s Point Holdings, for Hilton Barbados investment also guaranteed by the Government of Barbados? The answer is no and before I engage you in the financial side of the business to justify that conclusion, I will outline a point regarding proper hotel management.
For one thing, it is standard practice for reputable hotel entities to set aside at least four per cent of their revenues annually for capital expenditure. This is done to ensure that the hotel remains in good standing as well as to allow the entity to replace furniture, fixtures and equipment, usually referred to as the “capex retention”.
In 2016, in the face of boasts about a record tourism performance in 2015, and projected record performance in 2016 from the leadership of the Barbados Tourism Marketing Inc. and massive duty-free concessions, the owner’s return fell sharply to about $8 million, almost less than half the amount required to fund the debt service. This is poor financial conversion as far as I am concerned.
What is occurring at Needham’s Point Holdings is cause for serious and critical enquiry. The directors of Needham’s owe it to the country to tell us if they have paid a dividend in the last eight years.
The truth is that Needham’s Point Holdings has dug itself into a deep hole that will now require it to borrow money every five to seven years to refurbish the hotel, which is usually the cycle for major hotel refurbishment to maintain quality and competitiveness.
So therefore, by the time or even before the $22 million loan is repaid, Needham’s will have to borrow again to refresh the hotel and the cycle will repeat itself, except at a significant cost. At the same time, it would not have earned enough revenues to pay a dividend, and certainly it would not have earned enough cash to fund the balloon payment of $44 million due a commercial bank in approximately six years, the loan from the NIS, the $80 million bond issue and the other loans due within four years. So if one were to add this latest loan to its already existing portfolio, Needham’s Point Holdings would be in a liquidity crisis.
And if we are to believe the reported comment from the Minister of Tourism this week that in 2016 the income from the hotel was $2.4 million, I would have to ask him if such income was sufficient to pay the administrative expenses and debt service on loans in excess of $100 million.
Finally, considering the staggering loan portfolio and the impending liquidity crisis it will face soon, should Needham’s Point Holdings not have sought financing at lower rates to better manage its debt strategy and lower its gearing? There are more questions that need to be answered, but luckily there is a way out of this sorry mess.
– IAN GOODING-EDGHILL is a hotel business executive and Barbados Labour Party candidate for St Michael West Central.