Investors are piling into bearish bets against Travelodge Hotels Ltd’s debt as the market becomes increasingly concerned about the UK budget hotel chain’s outlook and refinancing prospects.
A record 23% of the company’s €250 million ($289 million) floating-rate notes due 2030 are now out on loan, a roughly four-fold increase since January, according to data from S&P Market Intelligence. Short interest in the company’s 2028 bonds is also hovering near an all-time high of 7% reached last year.
The mounting pessimism comes as Moody’s Ratings cut privately held Travelodge deeper into junk territory late Wednesday, citing weaker financial performance, deteriorating debt metrics and concerns over the sustainability of the company’s capital structure.
The firm, which is majority owned by US hedge fund GoldenTree Asset Management, faces “persistently negative free cash flow,” Moody’s analysts including Andrea Usai wrote.
“With the largest tranche of debt due less than two years away and an earnings trajectory that offers limited deleveraging capacity, refinancing conditions look increasingly challenging,” they said.
Travelodge has around £623 million ($833 million) equivalent of notes outstanding, including £415 million of senior secured notes maturing in April 2028, according to the Moody’s report. A £50 million revolving credit facility, which remains undrawn, matures in October 2027, the report said.
Urging Caution
As early as January, Citigroup Inc.’s trading desk was urging caution around the bonds, according to a report seen by Bloomberg. Citigroup’s baseline recovery rate implied the bonds should be trading in the 70s, with a downside case of a selloff extending into the 60s, the report said.
A spokesperson for Citigroup declined to comment. A representative for Travelodge did not immediately respond to requests for comment.
Travelodge’s 2028 notes were indicated at around 94 pence on Thursday, according to pricing compiled by Bloomberg. That’s down from over 102 pence in January and close to a record low of 93.3 pence hit last month. The 2030 securities were indicated at around 83 cents.
Travelodge leases and manages more than 600 hotels throughout the UK, Spain and Ireland. GoldenTree took a controlling stake in the company together with Avenue Capital Group and Goldman Sachs Group Inc. after a debt restructuring in 2012.
During the pandemic, the firm implemented a restructuring to slash rents by more than a third. It was among the first companies to withhold rent as the coronavirus struck Europe, riling landlords.