Cayman News Service
Unrealistic projections behind failures says survey
(CNS): A survey of lenders in the Caribbean revealed that tourism development projects that have either stalled or failed in the region did so because of unrealistic projections or forecasting. The “Caribbean Regional Financing Survey” by KPMG’s regional advisory practice also pointed to lack of cash and poor financial management. As a result the lenders surveyed said the key lessons they had learned would see a back to basics, conservative, long- term approach to lending in the region. The accountants also found that failed or half-built projects will continue to find it very hard to refinance.
This year for the first time KPMG also included development banks in the survey to capture the emergence of a potential new source of financing in the sector. Lenders were asked about the key lessons learned over the past year and in general the responses revealed a back to basics return to a conservative, long- term approach to lending. “The common themes that emerged from this year’s report should not be a surprise to anyone.
There is a more cautious lending environment across the entire region,” said Tully Cornick, (above) head of Corporate Finance with KPMG in the Cayman Islands.
Kris Beighton, (right) a partner with KPMG in the Cayman Islands and head of its Transactions and Restructuring group said: “Lenders appear to be seeking more contact with their clients, more frequent reviews of their projections, taking a more ‘hands-on’ approach and encouraging clients to plan for tough times.”
With respect to development financing, responses indicated that the level of reliance on pre-sales had become very unattractive and should pre-sales be considered as a source of funding then more manageable phasing and more thorough due-diligence would be required.
Lenders said they remain cautious about the projects they are willing to finance and where. When asked to name their current top three markets they noted The Bahamas; Barbados and Bermuda. However, when asked about future investment, there was less agreement, with The Bahamas, Jamaica and Costa Rica all in the running.
All agreed that good airlift and strong market demand were crucial for the success of any project. Collectively those surveyed reported total exposure in the region in excess of US$2.58 billion.
When asked what characteristics might suggest to them that a development should be re-financed or otherwise revived they noted: Strong project sponsorship (new and sufficient infusion of cash), quality of sponsors and current customer base, strong project fundamentals and structural competencies such as good location, adequate airlift and viable infrastructure.
KPMG also revealed that some lenders were not willing to share quantitative responses concerning loan parameters, a reflection of the more cautious attitude, the accountants said.
Other findings in the survey included the average debt service coverage ratio covenants and interest rate margins are higher than they have been for a long time; average loan to value ratios remain relatively consistent and the average loan tenor has shortened.
KPMG stated that recovery in the major tourism and investment markets will take time to translate into recovery in the region. “The development pipelines will be fairly slow for the next two to three years and the roller coaster ride in personal savings and investments over the last few years could further dampen the demand for second homes even longer; the exception being very high net worth individuals,” it said in a release about the survey.