When Bank of Scotland Ireland leaves, its many hotel customers will have major trouble sourcing capital, writes SUZANNE LYNCH

LAST WEEK’S announcement by Bank of Scotland (Ireland) that it is to pull out of the Irish market has once again thrown the state of the Irish hotel industry into the spotlight. The announcement by the bank that it will cease providing working capital to its business customers at the end of the year may have serious ramifications for the sector.

Hotels are disproportionately affected by the closure – while it is estimated that Bank of Scotland Ireland is responsible for around 6 per cent of lending to the SME sector, it lends to approximately 20 per cent of the hotel industry, equating to more than €2 billion in long-term loans. In addition it provides upwards of €30 million in working capital to the sector – a facility that will be wiped out by the end of the year. It is estimated that up to 150 of the Republic’s 900 or so hotels, could be affected when Bank of Scotland Ireland shuts up shop.

The closure of BoSI has crystallised an issue which the Irish Hotels Federation has highlighted – the precarious short-term financial situation facing hotels. As the summer season draws to a close, the IHF is warning that the industry is entering a winter of discontent. The summer is traditionally the time when hotels make their money. While official tourism figures for the season are not yet available, early indications are that summer 2010 has not been kind.

Like other customer-based businesses, most hotel owners are reluctant to put their head above the parapet and concede the level of declining trade. But a whistle-stop tour around Dublin city centre hotels bears witness to the fall-off in business. Sitting amidst the salubrious surroundings of Dublin’s Shelbourne hotel, for example, during a mid-week August lunchtime, the atmosphere is somewhat subdued. It may be the height of the summer season, but apart from the odd smattering of American tourists, there is no sign of the peak-time rush at one of Ireland’s most famous hotels.

Other hotels around the city appear to be similarly affected by a slowdown in trade – results from the Merrion Hotel last week showed that the hotel continued to be loss-making last year, with turnover down by 20 per cent.

The situation is similar across the State, as the many advertisements for discounted breaks indicate.

Michael Rosney runs Killeen House Hotel, a 23-bedroom hotel on the outskirts of Killarney. He is at the coalface of an industry that has seen a serious decline in trade. Faced with declining visitor numbers, his hotel has been forced to cut its normal rate by 50 per cent for two weeks in August in an effort to attract visitors.

“Domestic holiday makers are the only thing that are keeping this business going, but overseas visitors are in serious decline.” His comments are borne out by the figures.

Incoming tourism into Ireland has been tumbling over the last two years. According to the CSO, the number of overseas visitors to Ireland between January and May in 2010 stood at 2,026,100, down from 2,951,800 in the same period in 2008 – equivalent to a drop of 6,130 visitors per day. In particular, the British market has fallen by more than one-third in the last two years, down from more than 1.5 million in the first five months of 2008, to 975,000 in the same period this year. Paradoxically, the cut-down prices that have been attracting domestic holiday-makers to Irish hotels are threatening the survival of the industry.

According to Rosney, the basic economics of the sector are failing. “The whole business model on which this business is based is the idea that during the summer you generate enough profit to offset the quieter winter period. The prices we’re charging means that we’re barely breaking even.”

This combination of falling prices and visitor numbers is storing up serious problems for hotels in the coming months, according to Paul Gallagher of the Irish Hotels Federation.

“Our members have had two difficult summers. Now they have a third. It means that any cash that had been in reserve has been already used up, so the need for working capital is even greater” he says. “Normally, the summer season would allow hotels to generate enough cash to repay the overdraft of the previous winter, but given the collapse in visitor numbers, many hotels are operating with seriously depleted cash.”

Bank of Scotland Ireland’s withdrawal from the market has added a new urgency to the issue. It means that hundreds of hotel, as well as business customers, will have to source working capital facilities elsewhere. In light of the current shrinking credit market, that will not be an easy task. “Banks are reluctant to take on new customers. This is particularly going to be the case when asset securities will continue to be held by Bank of Scotland (Ireland).” The IHF is warning that the number of hotels run by receivers which currently stands at just over 30, will rise to 100 by the end of the year, as more hotels struggle to remain solvent.

Concerns about short-term cash flow and solvency are just the latest problems to hit the hotel sector, which has been one of the biggest casualties of the Celtic Tiger years. Once a contained, privately owned entity, the typical modern Irish hotel is now more likely to find itself at the centre of Ireland’s financial maelstrom, entangled in a complex web of bank loans, tax breaks, that may ultimately lead to the commercial court or Nama.

The crucial problem facing the sector is that of over-capacity. A report by consultants Horwath Bastow Charleton last month estimates that there is an excess of 10,000 hotel rooms in the country, most of this due to the explosion of hotels which were built during the boom years on the back of tax-breaks.

The sector is also heavily indebted, with the average debt per room of the hotels developed within the last 10 years estimated to be in the region of €135,000 according to the Horwath Bastow Charleton report.

But ironically, while hotels have become a black spot in terms of bank lending, the willingness of banks to support heavily indebted hotels has been singled out as contributing to the problem of over-supply in the market. The hotel lobby argues that hotels with unsustainable borrowings and debt levels , which under normal conditions would be forced to close due to market forces, are being kept open, by banks which are reluctant to realise losses and write down loans.

Meanwhile, hotels which benefited from tax allowances in the past are remaining open for seven years to allow investors to retain capital allowances.

Nama has also become a key player in the hotel sector, and there are concerns the agency may skew competition. So far, loans related to 17 hotels have been transferred into Nama in the first tranche of loan transfers. Some believe the number could eventually be more than one hundred.

So what options are open? Earlier this month David Roche, head of Hotels.com pointed out that the airline industry has been much better placed to deal with the economic downturn because, unlike hotels, they can cut capacity to meet demand.

For the hotel sector, the options appear to be minimal. The IHF is arguing that unviable hotels need to be closed, but the practical realities of pulling down the shutters on hundreds of hotels, as well as the social impact on communities means it seems a remote prospect.

The other solution being proposed is some kind of state-guaranteed loan scheme.The closure of Bank of Scotland Ireland has prompted the Irish Hotels Federation to call for the introduction of a temporary scheme under which businesses would have access to a €150,000 credit fund, 50 per cent of which would be guaranteed by the Government. But whether the Government, which is already involved with the hotel industry through Nama, will be willing to sanction any further State intervention in the sector, remains to be seen.