Morgan Stanley’s credit traders are recommending investors buy bonds issued by Travelodge Hotels Ltd. after a steep drop in the UK budget hotel chain’s debt this year.
The bank’s trading desk is pitching Travelodge’s £415 million ($550 million) senior secured bonds maturing in April 2028, according to people familiar with the matter, who asked not to be identified because the information is private. While the market has been concerned about the company’s ability to refinance, the Morgan Stanley desk says Travelodge has multiple options to deal with the looming maturity.
Options laid out by the traders include getting more cash from majority owner GoldenTree Asset Management or bringing more hotels into the pool of collateral backing the bonds, the people said. The trading desk also said Travelodge could generate up to £200 million through the sale of freeholds and its Spanish business, which could be used to pay down some of its debt, or it could raise financing that has priority over the existing debt to help repay the 2028 maturity.
A representative for Morgan Stanley declined to comment while GoldenTree did not respond to a request for comment. A spokesperson for Travelodge said that the company is comfortable with the “optionality” it has to address debt maturities and that it continues to balance liquidity with investment in its estate.
Travelodge’s April 2028 bonds are now quoted at around 92.5 pence on the pound, down around 10 cents since the start of the year, according to data compiled by Bloomberg.
Travelodge has been struggling this year with the fallout from its handling of a sexual assault at one of its properties in 2022. Its chief executive officer stepped down in August, while an independent review published last month described “systemic failures” related to the incident and said its hotels still aren’t as safe as they should be.
Read more: Travelodge Accused of ‘Systemic Failures’ After Hotel Assault
The company is also facing tough trading conditions. While it reported a 4.2% increase in revenues for the first half in August, the company’s management said they were “mindful of the continued macroeconomic and political uncertainties” affecting consumer demand.
The Morgan Stanley traders acknowledged that a weak economic environment in the UK is likely to negatively impact Travelodge, the people said. However, the traders said the company should be able to mitigate this by reducing capital expenditure.
Investors piled into bearish bets against Travelodge’s bonds earlier this year as concerns mounted about its outlook and ability to refinance. The company was cut deeper into junk territory by Moody’s Ratings in June, while S&P Global Ratings revised down the outlook on its B- rating to negative, citing the looming debt maturities.
Founded in 1985, Travelodge is one of Britain’s best-known budget hotel operators with 630 sites mainly in the UK and Ireland, as well as several in Spain.