CARE Ratings Nepal Limited (CRNL) has continued to keep the issuer rating of Varnabas Museum Hotel Limited (VHL) at ‘CARE-NP B-’ on credit watch with negative implications, citing severe damage caused by the fire and vandalism during the Gen-Z-led protests in September 2025. The rating agency has also maintained the ‘CARE-NP B-’ rating for VHL’s long-term bank facilities and ‘CARE-NP A4’ rating for its short-term bank facilities, both under credit watch with negative implications. Varnabas Museum Hotel Limited (VHL) has total rated facilities of Rs. 968.20 million, comprising Rs. 940.63 million in long-term bank facilities and Rs. 27.57 million in short-term facilities.
Hotel Remains Non-Operational After Major Fire
Varnabas Museum Hotel is a five-star hotel located in Baluwatar, Kathmandu. The company was incorporated as a private limited company on November 27, 2018, and was subsequently converted into a public limited company on August 13, 2024. The hotel has a total capacity of 48 rooms and began partial operations in February 2024, with full-fledged operations commencing from mid-April 2025.
However, the hotel suffered severe damage during the Gen-Z-led protests of September 8–9, 2025, when vandalism and arson resulted in a major fire that spread throughout the building. Although the building did not suffer external structural damage, the ground floor was completely burned, while the interiors of other floors were affected by smoke. The hotel’s mechanical, electrical, and plumbing systems, decorative elements, and other facilities were also damaged. The hotel is currently undergoing reconstruction and remains non-operational, exposing the company to heightened financial and liquidity risks.
Hotel Operated for Only 1.5 Months in FY26
The disruption had a significant impact on Varnabas Museum Hotel Limited (VHL) ‘s financial performance during FY2025/26. According to CARE Ratings, the hotel operated for only around 1.5 months during FY26, generating total operating income (TOI) of approximately Rs. 3 million, compared with Rs. 22 million in FY25. The hotel had operated for approximately 4.5 months at full-fledged capacity before the protest-related damage forced the suspension of operations. The company has also reported cash losses since inception, while its financial structure remains leveraged.
Reconstruction Expected to Take Around 13 Months
CARE Ratings said the total reconstruction cost is expected to be financed through a combination of insurance proceeds, debt and equity financing. The hotel is expected to remain out of operation for around 13 months, with operations currently expected to resume from mid-October 2026. The ability to complete reconstruction on time and restart operations will therefore be a critical factor for the company’s financial recovery.
CARE Ratings has emphasized that Varnabas Museum Hotel Limited (VHL)’s ability to resume operations promptly, achieve the targeted occupancy level and average room rate (ARR), and generate sustainable revenue and profit margins will be crucial for improving its solvency and debt-service coverage indicators.
Leveraged Capital Structure and Weak Debt Coverage
Varnabas Museum Hotel Limited (VHL)’s capital structure remained leveraged, with its overall gearing ratio standing at 1.50 times at the end of FY25. The company’s interest coverage ratio remained negative during FY24–FY25, primarily due to negative PBILDT. Its total debt to gross cash accruals also remained negative during the period. The financial pressure is expected to remain significant during the reconstruction phase, particularly while the hotel is unable to generate operating revenue.
Floating Interest Rates Add Financial Pressure
Another key weakness identified by CARE Ratings is Varnabas Museum Hotel Limited (VHL)’s exposure to volatile interest rates. The company’s borrowings are linked to a floating interest-rate regime, with interest rates adjusted based on the monthly base rates of banks and financial institutions. Changes in liquidity conditions in Nepal’s financial system can lead to fluctuations in borrowing costs. As Varnabas Museum Hotel Limited (VHL) is a debt-funded project, any increase in interest rates could raise its financial burden, squeeze margins, and further weaken its liquidity position.
Intense Competition in Kathmandu Hospitality Market
The company also faces significant competition from Kathmandu’s growing hotel industry. Nepal’s hospitality sector is fragmented, with numerous organized and unorganized hotels operating across different regions. Kathmandu has a particularly high concentration of hotels, which could intensify competition for customers.
CARE Ratings noted that increased competition could result in competitive pricing and subdued average room rates, even when tourist arrivals increase. Varnabas Museum Hotel Limited (VHL) is also exposed to geographic concentration risk, as its entire hotel operation is concentrated in a single property in Kathmandu. Hotel occupancy and revenue remain vulnerable to broader domestic and international economic conditions, further adding to the company’s operating risks.
Strategic Baluwatar Location Supports Rating
Despite the challenges, Varnabas Museum Hotel Limited (VHL) benefits from a strong strategic location. The hotel is located in Baluwatar, Kathmandu, approximately 7 kilometres from Tribhuvan International Airport, providing access to the country’s primary international gateway. Kathmandu is the main entry point for international tourists arriving by air and remains one of Nepal’s most visited tourism destinations.
The capital also offers proximity to major attractions, including its UNESCO World Heritage Sites, historic Durbar Squares and cultural landmarks. The hotel is also located within reach of destinations such as Nagarkot, which is known for Himalayan views. CARE Ratings considers the hotel’s location a key strength that could support demand once operations resume.
Tourism Sector Outlook Provides Some Comfort
CARE Ratings has also highlighted the positive medium-term outlook for Nepal’s tourism industry. Tourism continues to be a priority sector for the Government of Nepal, with the FY2026/27 budget allocating approximately Rs. 7.34 billion for culture and tourism activities and Rs. 2.93 billion for civil aviation development.
Government priorities include the expansion of the Greater Lumbini Development Programme, promotion of Janakpur as a wedding destination, development of the Great Himalayan Trail and regional tourism corridors, heritage conservation and improvements to airport infrastructure.
The government is also focusing on strengthening Tribhuvan International Airport, Pokhara International Airport and Gautam Buddha International Airport. According to CARE Ratings, increasing tourist arrivals and growing domestic tourism are supporting the recovery of Nepal’s hospitality sector, providing some comfort to Varnabas Museum Hotel Limited (VHL)’s medium-term outlook.
Insurance Proceeds and Promoter Support Offer Financial Cushion
VHL has received support from its promoters during FY26 through additional equity infusion, while proceeds related to property insurance are also expected to support reconstruction and meet the company’s financial requirements. These sources of funding provide some financial cushion during the reconstruction period. However, the company’s ability to complete reconstruction, restart hotel operations and achieve the originally envisaged operational performance will remain critical to its credit profile.
Timely Revival to Determine Future Rating
CARE Ratings has identified the timely resumption of hotel operations, improvement in occupancy, achievement of targeted ARR and sustained growth in income and profit margins as key rating sensitivities. The company faces considerable near-term financial pressure because of the prolonged shutdown and reconstruction requirements. Nevertheless, its strategic location, promoter support, insurance proceeds, and improving tourism environment provide potential avenues for recovery. The continuation of the ‘CARE-NP B-’ rating on credit watch with negative implications reflects the uncertainty surrounding Varnabas Museum Hotel Limited (VHL)’s ability to restore operations and achieve sustainable financial performance following the September 2025 fire incident.
