Inhospitable Foray

This is one investment in the hospitality business that has dealt a knockout punch to private equity firm Clearwater Capital Partners. In 2007, Kamat Hotels India had raised $18 million by issuing 5-year foreign currency convertible bonds to Clearwater Capital to fund its expansion plan to build the Orchid Hotel besides other properties.

As the placement was made at the height of the bull frenzy, the conversion price for the bonds was pegged at Rs.225 a share. But as the markets turned turtle and so did the fortunes of the hospitality sector, including that of Kamat Hotels, the conversion price was reset to Rs.135 in 2010.

Because of mounting losses and huge debt in the books, Clearwater had to convert the quasi loans into equity taking its stake to 32.2% in January 2012, triggering an open offer. Though the response to the open offer was poor, in 2013, the PE firm raised its stake to further 41.3% through acquisition of shares through open offer hoping that some of the debt issues will ease due to conversion and availability of CDR window.

That apart restructuring of business through merging of related companies such as the restaurant business in the main company, sale of real estate, divesting of few hotel properties and taking the franchisee model was aimed at turning around the business. But the slump in the hotel industry kept pulling down realizations as occupancy rates fell. From a high of 61% in FY11, the all India average hotel occupancy rate had fallen to less than 58% in FY13, which was the lowest in the decade. Similarly during this period, the average room rate fell from about Rs.6,500 to Rs.5,500 per day. Compounding Kamat’s woes was the failure to get the bankers’ nod for restructuring of the loans.

Though the debt-equity improved in FY12 thanks to conversion, it deteriorated from 3x to 7.2x in FY15 as losses started eating into the equity. The close to Rs.200 crore loan given to Orchid Hotels Pune and to subsidiary companies turned bad. The hotel’s cumulative losses of Rs.280 crore has wiped out its entire networth of Rs.206 crore.

In the face of this incessant southward trend Clearwater’s co-founder Robert Petty has had no choice but to cut losses. Since the year began the fund has sold close to 1,020,000 shares, with the latest tranche of 492,000 shares being sold on 4th August 2016, thus trimming its stake to 28.02%. Clearwater has sold the shares at an average of Rs.42 a share, taking a deep cut compared to its acquisition cost of Rs.135 a share. Post the sale, the stock has further fallen to Rs.32.25.