During economic recessions, occupancy rates of hotels generally decline, and as a result, the hotels are forced to reduce their room prices. The impact on a hotel’s cash flows may be such that it is unable to pay its debts when they come due.

Some years ago, the Hospitality Research Group studied the financial statements of 3,300 hotels. It found that 16 percent of hotels were unable to generate enough cash from operations to make debt repayments in 2000. The study estimated that this figure would increase to 20.9 percent in 2001 and 36.5 percent in 2002.15 What alternative sources of cash might be available to hotels whose cash flows from operations are inadequate to cover debt repayments?

Characteristics of Convertible Debt