TheChek News Flow

Italian hotels attract foreign investors as pandemic bites

Crisis threatens to force sales in fragmented and debt-laden sector

The coronavirus pandemic is spurring deal opportunities in Italy’s luxury hotel sector as international travel restrictions aggravate financial woes.

Italy is the only European country with more than 1m hotel rooms and big chains account for only 5 per cent of them, with the rest of the market dominated by small family-owned businesses.

Industry experts believe foreign investors have been deterred by small sizes and fragmented ownership that have undermined profitability. But the crisis threatens to change things as it ravages a sector that was already labouring under heavy debt loads.

The five-star Villa La Vedetta in Florence, for example, has permanently closed while many others, including Rome’s Hotel Raphaël, have not reopened since the first lockdown.

“Italian hotel assets have always been attractive for investors and this year many family-owned businesses are struggling and can’t afford reopening,” said Marie-Louise Sciò chief executive of her family’s Pellicano Hotels company. “There’s lots of activity in terms of real estate investments right now.”

French group Covivio in September finalised the €573m acquisition of seven Italian hotels, including Rome’s Hotel Exedra, from US private equity group Värde Partners, which bought the hotels for €150m in 2017 from Venice’s Boscolo family.

New York hedge fund Elliott Management sold famed Venice hotel Bauer to Austrian real estate group Signa over the summer after only a year of ownership, while London-based Orion Capital announced it was expanding luxury hotel brand Six Senses into Italy after acquiring an 18th century palazzo in Rome.

Gruppo Statuto, the indebted owner of the Danieli Hotel in Venice and the Mandarin Oriental and Four Seasons hotels in Milan, this year launched talks with lenders to reorganise its capital structure only two years after it was bailed out by London-based hedge fund TCI.

“Many institutional investors are searching for hotels in Italy but there’s more demand than availability,” said Bernabò Bocca, chairman of Sina Hotels group and president of the national hotel owners association, Federalberghi.

At the height of the pandemic, Italian opposition parties warned the crisis would lead to “international speculators” sweeping up the country’s prized hotel assets if the government failed to intervene.

It has happened before. Compagnia Italiana Grandi Alberghi, which for most of the 20th century owned the country’s biggest hotels in Venice, Rome and Milan, was sold to US hotel group Sheraton International in 1995 following a painful debt restructuring.

To block distressed domestic hotel owners from selling to foreign investors at a discount, state-backed investor Cassa Depositi e Prestiti has launched a €2bn real estate fund to take over the properties while leaving the management to the former owners with the aim of selling it back to them after 10 years. CDP is the biggest institutional hotel owner in Italy, followed by the Qatari sovereign wealth fund and BNP Paribas.

But some investors believe CDP’s scheme cannot be a long-term solution. “It’s like giving someone who is having a heart attack a cup of warm water,” said Paolo Barletta, chief executive of Gruppo Barletta, who is expanding Rosewood and Soho House into Italy.

“We need a plan to attract international luxury hotel brands that bring affluent tourists to the country,” he added. “It’s absurd that Italy’s hospitality sector is so fragmented and run at a family-level when tourism is such a big part of the country’s economy.”

According to national travel agency Enit, Italy was the top destination for affluent global tourists last year and the luxury tourism market, which is set to lead any recovery after the pandemic, will grow by 6.2 per cent by 2025.

Mr Barletta and Nicola Bulgari, grandson of the eponymous jewellery brand’s founder, recently launched Arsenale, a company that will focus on the acquisition and renovation of hotels in leading Italian tourist destinations that will be run by international hospitality brands.

“We’re looking at several properties in Rome and elsewhere and we’re always the only Italian investor seated at the table,” said Mr Barletta.

“Italy doesn’t have large hotel groups, so it’s obvious owners sell to foreigners, either because they’re struggling to repay debt or because [foreigners] offer more money,” he added.

Some industry insiders are relaxed about acquisitions by overseas groups.

“I don’t think it’s a tragedy if international investors buy hotels in Italy, it’s not great when foreigners buy assets and relocate jobs but hotels can’t be relocated,” Mr Bocca said, although he added that “if you have hedge funds coming in now to buy . . . at a discount because owners are burdened by debt, then it’s a different story”.

But others bemoan the prospect of the latest Italian asset group to fall into foreign ownership.

“I’m not sure the issue is only financial . . . just look at how Italian fashion groups were sold to foreign investors,” said Ms Scio. “There’s a lack of vision.”

Wealthy use Covid uncertainty to challenge divorce settlements

Economic confusion makes it hard to value assets and results in cases being reopened

Economic uncertainty in the midst of the Covid-19 pandemic, alongside the threat of an economically-disruptive Brexit, is leading to challenges of divorce settlements and maintenance payments, say lawyers.

As people across the UK lose their jobs and juggle business and living costs, many individuals are searching for ways to cut their outgoings. For the divorced, one option is to try to reduce payments to ex-partners or return to court to dispute financial settlements.

Some of these people — who include business owners — are using the current economic disruption to justify paying less money for their spouse’s share of assets, such as a stake in a family company.

One reader who contacted the FT but asked not to be named said her ex-husband has contacted her to say that “due to Covid-19 he has had to take a 50 per cent pay cut and will therefore stop the spousal element of maintenance payments”. This, she adds, is despite him earning a much higher salary today than he received when the judge initially set the maintenance rate.

She is not alone, according to lawyers, divorces are expected to keep rising in line with their long-term upward trend, and even spike higher due to the pandemic as lockdowns have amplified incompatibility in couples and wreaked havoc on the nation’s marriages.

The Office for National Statistics has reported a steady rise in divorces — 107,599 divorces of opposite-sex couples in England and Wales last year, up by nearly a fifth from the 90,871 in the previous year, albeit partly explained by a backlog of cases. More than two marriages in every five end in divorce.

Alex Davies, head of family at Cripps Pemberton Greenish, a law firm, says: “Major economic shocks always lead to personal financial uncertainty and divorced or separated couples are particularly vulnerable. Family lawyers have seen a dramatic increase in cases where someone tries to change a divorce settlement and that is expected to continue as Brexit follows the pandemic.”

Britain’s departure from the EU is expected to depress economic activity and asset values and bring potential disruption to key commercial sectors.

Mr Davies says maintenance payers worry about not being able to meet their obligations and the legal ramifications of defaulting, while maintenance recipients worry about how to afford their bills if the next payment doesn’t arrive.

Charles Hale QC, a barrister at law firm 4PB, says Brexit has caused considerable worry. “The anxiety levels are at maximum. Add that to a double Covid lockdown and it’s a perfect financial storm for many previously very successful businesses.”

Asset valuations are notoriously difficult in uncertain times. Any form of international dimension in a divorce compounds the problem. Few accountants can now confidently give business valuations that will extend beyond January 2021. 

Rosie Beaven, a family solicitor at law firm Trethowans, points out that market volatility means valuation reports obtained prior to March this year are likely to be out of date. “In turn, this means that any negotiations based on those valuations may need revisiting before they are formalised,” she says. “For some couples, the changes in value may mean going back to the drawing board and renegotiating their positions.”

The changes in asset prices are not all negative. The increase in property prices and the stamp duty holiday are having a positive impact on financial settlements involving real estate — for example, where a family home is to be sold.

But for some businesses “values have decreased substantially due to Covid-19”, says Ms Beaven. Also the pandemic may limit a business’s capacity to generate cash. “Liquidity can be an issue and with it the ability to release or raise funds. The person retaining the business interest may be keen to proceed with a lower valuation while the other person may wish to hold out and see if the business value increases.”

The pandemic affects not only those who are currently seeking a financial settlement but also people whose settlements were finalised in court before the pandemic and may now be in a different financial position.

“We are seeing cases where parties who were ordered to pay lump sums or spousal maintenance are now unable to do so due to a loss or reduction of income, plummeting asset values and tighter borrowing restrictions,” says Ms Beaven.

Where this is the case, people can consider applying to the court for a variation of the order. A court order can only be varied if there is a significant change in circumstances but Covid-19 has resulted in significant changes for some people, such as the loss of a job or a business failing.

However, Ms Beaven says: “Where a court order provides for lump sum payments to be paid by instalments, an application can be made to vary the timings of the payments but it is rare for the amount payable to be varied.”

Others warn that while one party might wish to progress a financial separation during an economic downturn, the other party may not.

Jenna Lucas, a family law partner at Irwin Mitchell and partner in The WealthiHer Network, a group which supports female investors, says she has seen expensive disputes over the timing of resolving financial issues. She predicts this will increase whilst the full impact Covid works itself out.

“Whilst courts want to achieve finality in divorce proceedings that is unlikely to be possible in more and more cases, particularly where businesses which have been impacted by Covid are concerned,” says Ms Lucas.

So what happens if a maintenance payer suffers a dramatic fall in income? Should he or she just stop paying and hope for the best? No, says Mr Davies. “The law is quite clear. If a court order for maintenance has been made or the Child Maintenance Service has made an assessment, that obligation is enforceable until changed by the court.”

Courts have the power to change maintenance arrangements and cancel maintenance arrears, particularly if circumstances change for the worse. If maintenance is genuinely unaffordable then a variation might well be necessary.

It is much more difficult to achieve a retrospective change to the split of assets after a divorce. During the global financial crisis of 2008 many tried and failed to rewrite their divorce settlements.

The best-known example is financier Brian Myerson; having agreed his wife could receive her settlement in cash, he retained shares in his company which stood at a healthy price at the time. Within a year the financial crisis had cut their value by 90 per cent.

Mr Davies points out that the court refused Mr Myerson’s attempt to rewrite the settlement. “He had made his bargain and had to stick with it, no matter the consequences.”

The courts are likely to take a similar approach today.

The battle for Fannie Mae and Freddie Mac is heating up

What are the chances that the Trump administration would want to leave a constitutional, legal, financial and politically explosive booby trap for the Biden administration? One with huge international financial risks? Which could allow some of the outgoing administration’s libertarian/investor sympathisers to make a substantial speculative profit on their positions in more than $33bn of orphaned preferred shares? For the consequences of which they could blame Obama and Bush administration appointees?

Good, I think. Even though it might frighten investors in trillions of US agency securities and anger the incoming Biden administration and much of the housing finance industry.

The next move is up to Treasury secretary Steven Mnuchin and Mark Calabria, who heads the Federal Housing Finance Agency, the housing regulator. They have been in discussions about the terms of an amendment to the preferred stock purchase agreement (PSPA), which covers the government’s controlling investment in Fannie Mae and Freddie Mac, the two government-sponsored entities (GSEs) that underwrite about $7tn of the $11tn US housing mortgage market.

The “preferred stock” referred to are the senior preferred shares which, along with warrants for 79.9 per cent of the common stock, are what the Treasury got in return for injecting $189bn into the GSEs from late 2008 to 2012, in the aftermath of the housing market crash and financial crisis. Up to now, the Treasury has received back the $189bn, and another $109bn in dividends above the original investment, and still has the prospect of profiting from its warrants.

The public-private-partnership fog allows both political parties to say they are supporting, ie subsidising, the decent, hard-working, middle class homeowner, without putting any financial risk or cost on the decent, hard-working, middle class taxpayer.

The harm, though, goes beyond the direct costs of the orderly grifting by lawyers, lobbyists and bankers. The pre-housing-bubble GSE ecology served a social purpose. Skilled workers or enterprising people could more readily sell their houses and then buy new ones through a more liquid national market. This encouraged labour and class mobility, and with it a long-term compounding of productivity gains.

Perhaps inevitably, though, housing market liquidity and easy finance led to high prices and speculative excess. Post-crisis reforms in housing finance, and more restrictive local permitting in response to earlier excesses, have reduced housing liquidity and labour mobility with a consequent decline in productivity.

Back to the scheming and speculation. In the first four years of the Treasury’s senior preferreds, the high dividends returned to the government were politically untouchable. The original terms were amended a couple of times through bilateral agreements between the housing regulator and Obama’s Treasury.

Then, in 2012 a third amendment was agreed that replaced punitive, but fixed, dividends with the “net worth sweep” of virtually all the profits from the now-recovered GSEs into the Treasury General Account.

The legacy shareholders mobilised. As one junior preferred investor says: “The third amendment was a mobster-style contract where you have to make payments but never have them counted as repayments.”

Mark Calabria, then an analyst with the libertarian Cato Institute, agreed. He went on to be an adviser to vice-president Mike Pence and then the sole housing finance regulator.

Calabria is seen as a sort of inside-the-Beltway Martin Luther, determined to take Fannie and Freddie out of “conservatorship” and Treasury control. He has four years left in office to carry out that reformation.

If anything, the coming departure of the Trump team might have accelerated one part of his plan: a “fourth amendment” to the PSPA that would end the so-called net worth sweep and allow the GSEs to keep earnings that could retire the senior preferreds, pay off the junior preferreds, and, eventually, pay dividends to the common.

In response to informed or uninformed chatter, the junior preferreds have risen by as much as 38 per cent since the election.

A deal would still leave Calabria and the lawyers with much wood to chop before the conservatorship could be ended. There are a lot of housing finance people who believe that is all a fool’s errand. Could Biden fire Calabria and reverse any fourth amendment in time to keep the “sweep”” coming?

That might depend on the outcome of Collins vs Mnuchin, a case to be heard by the Supreme Court on December 9. I would bet on volatility, rather than direction, for the GSE shares.

Long-awaited project to arrive as soon as January, with just one dollar-backed coin

The long-awaited Facebook-led digital currency Libra is preparing to launch as early as January, according to three people involved in the initiative, but in an even more limited format than its already downgraded vision.

The 27-strong Libra Association said in April that it had planned to launch digital versions of several currencies, plus a “digital composite” of all of its coins. This followed concerns from regulators over its initial plan to create one synthetic coin backed by a basket of currencies.

However, the association would now initially just launch a single coin backed one-for-one by the dollar, one of the people said. The other currencies and the composite would be rolled out at a later point, the person added.

Libra’s exact launch date would depend on when the project receives approval to operate as a payments service from the Swiss Financial Market Supervisory Authority, but could come as early as January, the three people said. Finma said it would not comment on Libra’s application, which was initiated in May. 

First launched in June 2019, the scaling down of Libra’s vision comes as it has received a sceptical reception from global regulators, who have warned that it could threaten monetary stability and become a hotbed for money laundering.

While the restricted scope may appease wary regulators, critics have complained that a move to single-currency coins could hit users looking to convert currencies with additional costs, undermining its ambition to enable greater financial inclusion.

Originally launched by Facebook executives, Libra suffered a difficult birth when a wave of its founding members — including PayPal, Mastercard, Vodafone and eBay — quit over in late 2019 and early 2020 and distanced themselves from the controversial project.

The association then announced in April that it was overhauling its vision to address regulators’ worries, limiting its scope and promising extra measures to police its system for abuse. 

Libra had also come under fire for its close association with the social media network, which has faced multiple privacy scandals. 

But several Libra members said that they believed the appointment of HSBC legal chief and former George W Bush-era terrorism finance tsar Stuart Levey in May as its first chief executive marked a turning point for the project, as it sought to cast itself as independent from Facebook.

Since then, a handful of members have been racing to build and test their own products to launch on top of the digital currency network when it goes live. 

Among them is Novi, the Facebook subsidiary rebranded from Calibra that has been creating a digital wallet to allow Facebook users to hold the Libra currency. 

One person involved in Novi said that the wallet was “ready from a product perspective”, but would not be rolled out everywhere initially, with the company prioritising “half a dozen high-volume remittance corridors” including the US and some Latin American countries.

Novi needed its own licence in each US state, the person said, adding that it had been granted many of these but was still waiting on “as many as 10” — including a New York Bitlicense.

It remains unclear how some of the major members of the consortium — such as Uber and Spotify — plan to wield the currency, with some telling the Financial Times that they would wait to see how it was received after its launch, before investing in use cases.

The news comes as Bitcoin, the original cryptocurrency, rallied to record highs of close to $20,000 this week, amid rising interest in digital currencies from professional investors and central banks, and as the coronavirus pandemic has quickened a shift from cash towards digital payments.

Meanwhile, PayPal, which was the first founding member to drop out of the Libra initiative, announced last month that it would launch support for cryptocurrencies, including at the checkout, with Dan Schulman, chief executive, calling the shift to digital forms of currencies “inevitable”. 

The Libra Association and Novi declined to comment.

Investment group put off making a big bet due to Covid-19 and sky-high valuations

3G Capital, which invests alongside Warren Buffett, is seeking to hold on to its investors’ money for longer as coronavirus uncertainty and sky-high valuations delay its next megadeal, say people briefed about the matter.

The Brazilian-US investment group behind Kraft Heinz, Burger King and Tim Hortons has been on the hunt for a megadeal ever since it failed to orchestrate the $143bn takeover of Unilever in 2017. It is now sitting on about $10bn of deployable funds.

The New York-based fund predominantly manages the money of its Brazilian founding partners and their high-net worth friends, which in addition to Mr Buffett includes Colombia’s Santo Domingo family and tennis champion Roger Federer. 

The decision to seek more time reflects the broader market conditions, which despite the pandemic has seen the valuations of several companies rocket this year partly thanks to the stimulus packages that have inflated assets values in many sectors. 

A person briefed about the conversations with 3G’s investors said that the fund’s move to seek more time to deploy capital was not a prediction about a near-term market decline. Rather, the company wants to avoid pressure to execute a deal by a certain date or be forced to return funds. It is unclear when the current fund would expire, but two people said that it was not imminent.

3G, which was co-founded by Brazilian investor and billionaire Jorge Paulo Lemann, typically secures large amounts of debt to finance its deals on top of its fund’s cash, by raising borrowings against a target company’s balance sheet. This allows it to go after deals that can range between $20bn and more than $50bn. The fund’s partners are also deeply involved in the management and turnround of their targets.

3G tried to buy the lifts business of Thyssenkrupp in February but was beaten by a rival bid made by private equity groups Advent and Cinven, which acquired the asset for €17.2bn.

However, the decision to bid for an industrial asset indicated that 3G is considering deploying capital away from the consumer industry, which has been its primary focus over the past decade.

The potential shift away from the consumer goods sector comes after Kraft Heinz — which 3G acquired together with Mr Buffett — was beset with multibillion-dollar writedowns and is undergoing a turnround plan.

3G also teamed up with Mr Buffett’s Berkshire Hathaway to acquire Burger King, Tim Hortons and Popeyes, three fast food and coffee chains that are under the Restaurant Brands International holding group. RBI has been one of 3G’s biggest success stories as its investment has grown by a factor of more than 15.

Alex Behring, co-founder and chief executive of 3G, told the Financial Times in a rare interview in 2017 that after failing to acquire Unilever it would only pursue friendly deals in future. “We don’t need to go anywhere that we are not welcome by shareholders in order to do a deal,” he said.

Michelin-starred chefs have reinvented their operations during the Covid-19 pandemic

Before the Covid-19 pandemic, New Yorkers had a hard time scoring a seat at chef Nozomu Abe’s Michelin-starred restaurant on Manhattan’s Upper East Side.

Now Mr. Abe brings Sushi Noz’s $325 omakase tasting menu directly to diners, catering small events and intimate private meals at homes, even though that frequently involves two-hour drives to Long Island’s East End.

“Many of my customers are not in New York City, so I get called to the Hamptons, six to eight times a week, sometimes three times a day,” the chef said.

The pandemic hasn’t changed what well-heeled foodies like to eat, but it has upended where some of them live and their thinking on dining out.

Some high-end Japanese restaurants have reinvented themselves to accommodate the migrations and shifting habits. Sushi Noz and others now trek to the second homes of New York City residents in the Hamptons and the Hudson Valley. Other restaurants, such as chef Masayoshi Takayama’s three-Michelin-starred Masa, have entered the delivery business in Manhattan. Masa now sells $800 sushi boxes meant to feed a four-person household.

Even Yama Seafood, an East Coast fish distributor that supplies several high-end sushi restaurants in New York City, has recognized the changing demands. When the pandemic hit, the supplier cut its staff to 15 from 75. To survive, it started delivering to wealthy clients a rare cut of tuna, known as kama-toro; live Japanese hairy crabs; and Daisen sea urchins that cost $1,000 for 350 grams, or about 12 ounces.

“We now have a new retail business line,” said Nobu Yamanashi, director of Yama Seafood.

While some have been able to adapt and thrive, other Japanese restaurants, especially midprice outposts, have folded. Omakase by Teisui near Manhattan’s Madison Square Park, and Inakaya in Times Square, have closed permanently, according to their websites. Diners at those restaurants typically paid $85 to $150 for their meals. Some high-end establishments, such as the two-Michelin-starred Sushi Ginza Onodera on Fifth Avenue near Bryant Park, have closed temporarily.

“There is a real danger that if not careful, over 70% of Japanese restaurants in New York City may disappear,” said Chikako Ichihara, treasurer of the New York Japanese Restaurant Association.

Some of the city’s Japanese restaurants were already facing tough challenges to their business, industry experts say, including limited options for funding.

Ms. Ichihara said Japanese restaurants lack local community support because of the relatively small Japanese diaspora in the U.S. By contrast, Chinese and Korean restaurants are often supported by a strong network of community banks, she said.

Ms. Ichihara said she estimates that 90% of Japanese restaurants in New York are funded by individuals, while only 10% of the financial investments come from Japanese restaurant groups.

Finding an experienced trained sushi chef and paying for the chef’s visa can also be too pricey, she said, especially for midrange Japanese restaurants. These restaurants, which offer meals that typically cost $100 to $150 a person, also haven’t shifted to delivery service during the pandemic as easily as high-end and low-price sushi shops, according to Aaron Allen, of restaurant consulting firm Aaron Allen & Associates.

Ms. Ichihara said some high-end restaurateurs have also seen an opportunity in more down-market fare.

Two years ago, Hiroki Odo opened o.d.o., a Michelin-starred 12-seat counter restaurant in Manhattan’s Flatiron District, selling a $200 nine-course chef’s choice menu.

In June Mr. Odo, a master chef, launched a new casual sushi line in Brooklyn called HALL by ODO. The new restaurant sources its sushi in Japan, but keeps the cost low by slicing and flash-freezing slabs of sushi-grade fish into bite sizes at a central kitchen. Then the fish is flown directly to New York.

Mr. Odo said he has managed to serve high-quality sushi at $23 for a 10-piece delivery box.

“Timing was actually good, because with the pandemic, demand for delivery rose quickly,” he said.

Private equity firm moves to acquire Ann Taylor, Lane Bryant, Loft and Lou & Grey stores out of bankruptcy

Sycamore Partners has agreed to pay $540 million to buy Ann Taylor, Lane Bryant and other store brands from Ascena Retail Group Inc., the brands’ bankrupt parent company said Thursday.

The proposed deal would also deliver the Loft and Lou & Grey brands to Sycamore, subject to approval from the bankruptcy court where Ascena filed for chapter 11 protection in July.

Ascena said Sycamore “has committed to retaining a substantial portion of the retail stores and associates” affiliated with the brands it is buying. As of late August, Ascena operated 1,500 stores throughout the U.S.

The company has already sold its Justice and Catherines brands out of bankruptcy as online-only businesses.

Permanent closures of retail stores in the country hit a record in the first half of 2020 as pandemic lockdowns and shoppers’ fear of disease curbed foot traffic, pushing Ascena and dozens of other retailers into bankruptcy.

Some, such as Brooks Brothers Group Inc. and J.C. Penney Co. , found buyers. Others including Neiman Marcus Group Inc. and J.Crew Group Inc. handed themselves over to lenders. A few, like discount retailer Stage Stores Inc. and women’s brand New York & Co. , simply had to liquidate.

Before filing for chapter 11, Ascena tried several steps to soften the pandemic’s financial impact, including temporarily closing all its stores in March, reducing capital expenditures and assessing vendor-payment terms.

Ann Taylor, the company’s flagship chain, was once a retailing bellwether, selling many women their first suits as they entered the workforce. The retailer tried for years to manage the shift to casual dressing, launching the Loft brand in 1998, but never recaptured its former glory.

Last year, Ascena wound down its Dressbarn business, with more than 650 retail stores, to eliminate debt while selling Dressbarn’s e-commerce rights for about $5 million.

Following the bankruptcy filing, Ascena said it would shut some Ann Taylor, Loft, Lane Bryant and Lou & Grey locations with the aim of reducing its store count, exit Canada, Puerto Rico and Mexico, and focus more on e-commerce.

The retailer entered chapter 11 with support from the bulk of its senior lenders, which had agreed to a roughly $1 billion debt-for-equity swap that would hand them a controlling stake in the company.

The lenders have instead agreed to support the proposed sale to Sycamore and an agreed framework for divvying up the proceeds, according to court papers.

“Ann Taylor, Loft, Lane Bryant and Lou & Grey are well-known brands, each with passionate associates and loyal customers,” said Sycamore managing director Stefan Kaluzny, a veteran retail deal maker.