Operations
Silverfern Keys Cove, an island resort in the Whitsundays, must take fixed cost out to meet a bank covenant while a renovation program depresses occupancy.
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Your client is Silverfern Keys Cove, a 120-room island resort in the Whitsundays, Australia, purchased three years ago by Meridian Capital Partners, a private equity investor. The resort operates one restaurant, two bars, a dive center, a spa, a fitness center, a 40-meter lap pool, and three swimming pools. Around 140 staff serve the resort in peak season; management and operations amount to 96 full-time equivalents year-round.
The resort's capital structure carries an EBITDA covenant of $2.4M per year, tested annually. In the last financial year the resort earned EBITDA of around $4.1M, comfortably above the covenant. This year has been different. A design review found non-compliant materials in the 42 rooms of the older guest wing; rectification requires wall linings to be stripped and reinstalled, and while the work proceeds, affected blocks are sold to a contractor for use as temporary site accommodation. The contractor pays for the rooms, but the current occupancy rate is only 52% and the owners expect occupancy to return to normal (above 70%) once the rectification program completes next year.
The bank has flagged the covenant and the owners have asked you to lead a cost reduction program. Meridian Capital's investment committee has capped any changes to payroll, stating that guest experience must not be affected during the rectification program, and the board wants the total cost reduction to stay well below a quarter of the total cost base. You have been asked to identify where the cost base can be reduced and to quantify the opportunity.
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