Transparency brought to light

Highlights of "2nd ITB Hospitality Day": Solvency factors for hospitality

Berlin (March 30, 2007). Werner Pauen, an expert in the field of hotel and external financing, has analysed the solvency rating factors of tourism and hotel companies. On the 2nd "ITB Hospitality Day" the former financial head of the Accor and Dorint hotel groups explained a diagnosis instrument which is to grant more transparency and security to tourism and hotel companies as well as to financing partners. An interview and his presentation for downloading.

Mr Pauen, you gave a speech at the ITB hotel congress three weeks ago analysing issues concerning evaluation and solvency of companies. Why do you address this issue today as Managing Director of a real estate and financing company (Dr. Peters in Dortmund)?

Werner Pauen: I've been thinking about this issue since my classical hotel time, and it can be transferred to all other sectors in the end. It is all about increasing the hit rate connected to credit rating assessments.

Why is that important to evaluate the solvency?

Pauen: It clearly influences decisions concerning the approval of (credit) financing! Since 2003, the number of insolvencies has been on a high level in the catering industry; statistics of the Federal Statistical Office clearly prove that. Companies that don’t know the factors influencing their solvency rating are unable to improve them and will therefore become a part of this "necrology" sooner or later.

What factors influence the credit rating of a hotel group in the first place?

Pauen: For this I've introduced six major sections in my business model approach. All of them interlock with one another: Organisation, growth, performance, turnover, communications and collaboration. In my presentation, I called them "concepts".
The growth section, for example, can be operationalised via the components of expansion speed, economic indicators like hotel market, financing or operating models. Regarding the performance concept, one should try to get to the bottom of what the guests want most (a mere overnight stay or comfort). This is followed by the question of how a hotel reacts to the performance product. Another element is the earnings section. It is focused on rates and quality features. How can it be improved? Customer satisfaction is a contributing factor here.

Does this mean that all sections influence each other?

Pauen: Yes, every section influences the solvency rating on its own, but also in combination with all the others. All this can be demonstrated with the business model approach - in two ways: a) What are the model's components, b) Which factors influence a company's credit rating in a certain period of time? This was probably different 40 years ago - I've described the factors of the past 10 years.

In your speech, you said that all this was based on a complicated calculation model. What does it look like?

Pauen: In short, this approach determines the type and strength of the factors influencing the solvency rating based on functional interdependencies. In this way, it is possible to determine the impact of the hotel market economy (expressed by the number of roomnights), the growth speed (number of new hotels per year) or the customer satisfaction on a company's credit rating. The solvency rating indicators again are a reflection of the elements of the profit and loss account and the balance sheet.

You've mainly analysed the growth concept. Why?

Pauen: Because we thought that growth has an important influence on success and credit rating. It has always been obvious that there is such an influence. However, there are still some unsolved issues, such as the question, what sign should be in front of the growth (positive or negative) or how strong is it? Should a hotel group expand with two or 20 hotels per year? It seems clear that a highly expansive strategy has led to a negative influence on solvency ratings among German chain hotels. Another partial result is that, for example, customer satisfaction is of a greater importance to solvency ratings than the amount of initial capital, i. e. the initial solvency rating at the beginning of an observation period.

Who can work with this business model approach?

Pauen: It's just an application tool that you can pull out for use. You only need to enter a few of your own figures. It's a scientific approach that helps financing institutions or hotel and other companies to put into question their own evaluation criteria and achieve more transparency.

The interview was conducted by Maria Puetz-Willems.

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