A new limited-release Luxembourg-based capital guarantee bond has been launched in a bid to capitalise on opportunities in the post-pandemic tourism and hospitality industries in Europe.
In this question-and-answer session, we speak to Christopher Griffin (pictured below), CIO at GESCO T1, about the five-year GESCO T1 Ltd bond which has been designed as a fixed-income impact investment to provide vital funds into the beleaguered European hotels and resorts industry, with the chance to access a share in the potentially lucrative post-pandemic cut-price hotels and resort property market.
Q1) What does your proposition do?
Chris Griffin: In simplest terms, GESCO T1 Ltd has developed a post-pandemic European beachfront hotel and resort acquisition strategy whose basic premise is to buy properties at a discount, develop a geographically diversified portfolio, and then exit in 2026.
2) What is the structure of this investment?
CG: Our investment is a credit-linked product structured as five-year secure bear debentures bonds in Luxembourg with a total ceiling of €250m, which equates to 2,000 bonds.
3) What makes GESCO different?
CG: We are providing a fixed income product with the goal being to rehabilitate an industry following one of the greatest financial catastrophes in history.
Of course, we want to make money, we want the investors to feel safe, but we are also focused on economic development by creating jobs and protecting and supporting the entire business ecosystem that surrounds hotels and resorts.
There are real estate funds and other investments that have some similarities to what we do, however our bond holders are sharing in the profit at exit. This means if we hit our exit target, which is predefined and directly correlated to the coupon, that will be reflected in the portfolio's value which includes all the revenue streams at each property.
4) Who are the key members of the team?
CG: I am currently CIO and I was in wealth and asset management. Before that I worked in the military and government sector both as a uniformed member of the armed forces and as a contractor supporting those entities.
The director of the company, Øyvind Berger, has a background in real estate development as well as project and programme management, in both commercial and residential properties.
We have other team members in the UK and Canada as well as a litany of consultants across a spectrum of areas of expertise, to include an investment board.
5) What level of protection do I have in my investment?
CG: The bottom line is that 100% of GESCO T1 assets are pledged towards collateralisation of the bonds. As long as bonds are sold, capital is flowing and acquisitions are being made, there will always be a certain level of safety.
We have an ongoing pipeline of potential acquisitions that we are currently reviewing which is about 100 properties per week. Maintaining an active acquisition pipeline is equally as important as selling bonds.
For us, the worst-case scenario would be that we default on the coupon and the investor would receive their initial investment. But because we are buying at a discount, we do anticipate that the markets will improve, and valuations will increase. So, a situation like a default is highly unlikely.
6) What about any early redemption charges?
CG: Our early redemption fee is 20% and a forfeiture of all accrued interest within the first 36 months. We do this because we need time to come into a property, rehabilitate it, make changes, and get past the pandemic.
We are structured to highly encourage and motivate investors to give us at least three years.
7) What jurisdiction is the investment housed and how is it regulated?
CG: These are European, Luxembourg domiciled securities issued, administrated, and managed by three Swiss companies MTCM, ISP Securities, and Praetorian Assets.
It is important to understand that GESCO is not involved in any trades or financial transactions as we are not a financial services company.
For an investor, there is a definitive recourse through regulated entities in Switzerland and Luxembourg.
8) What happens if the pandemic and travel prohibitions continue for much longer than expected?
CG: The UN World Travel Organization and most industry experts believe that the vaccine adoption, government intervention, the ease of travel, and the pent-up demand means that the industry will recover to 2019 [pre-pandemic] levels by 2023.
Our structure is five years, ending in May 2026, with the objective to merely reach or exceed 2019 levels.
If we can acquire a property at a 50% discount of its 2019 pre-pandemic valuation, then exit in five years at that valuation, we have basically doubled the investment.
On the other hand, if the pandemic was to continue through 2022 or 2023 then this is still within the timeline of our investment structure. It could be helpful as there could be more acquisitions or higher discounts.
9) You have a set a % for return each year. How does that work and what is the end of term figure that you would expect to pay?
CG: The annual coupon is set between 4-10% per year, then at exit everything is reverse calculated.
If hypothetically we bought €250m in properties and we exited at €500m then that means that would max out the coupons so [the investor] would receive 50% on top of their original capital.
10) How long does it take to re-develop a property?
CG: All the properties we are viewing now do not require redevelopment. In fact, most of them require some minor refurbishment to wear and tear.
What we are focused on are minor changes especially with respect to the business plan, marketing, sales, technology and customer service that can be introduced quickly and at low cost.
11) Do investors get to enjoy and stay in any of these properties?
CG: We've told people before if they wanted to invest and then stay in the properties then they are more than welcome to.
Also, because we have an online management pipeline tool, bond holders who are interested can see in real time the properties that we are looking at - pictures and videos of those that we are beginning the due diligence on.
12) What regions are you specifically looking at making investments?
CG: We are really focused on Italy, Spain, Croatia and Greece. All beach front properties with 200 rooms or less, three, four or five-star properties.
For a three star we would convert them to four stars, four stars to five stars and a five star we would work on improving them.
The countries we chose were specific because they were hit the worst by the pandemic, the inventories are very high, there is good infrastructure in place, and they are all in the EU, which offers a little bit of stability but also they come with geographic diversity.
Designed for both qualified and institutional investors, GESCO T1 Ltd. has issued a Luxembourg-based note, GPP Euro Resort Impact Stability (ISIN CH0549200217), listed on the Vienna Stock Exchange, with an initial volume of €250m and is now available.
Click here to find out more about the GESCO T1 Ltd bond offering.