Special report: How Bredbury Hall was hit by international debt deal
IN a special investigation amid continuing disquiet over the behaviour of major lenders towards business customers, TheBusinessDesk.com looks at how actions taken by a major high street bank to strengthen its balance sheet have pushed some of its former customers into administration.
WHEN the Stockport hotel Bredbury Hall went into administration earlier this year it appeared to be another business that had succumbed to the pressure of debt.
But the insolvency was linked to an international sale of a bundle of loans by Lloyds as the bank attempted to strengthen its balance sheet in line with new regulations introduced following the 2008 crash.
Bredbury’s directors, and those of another hotel business affected by the same strategy, feel they were hung out to dry by a partly state-owned bank despite being profitable and consistently meeting repayments.
They believe they were pushed into Lloyds’ Business Support Unit, its “bad bank”, through an “engineered default” triggered by a revaluation of their assets at a time when hotel values had tumbled.
A similar claim was made against Royal Bank of Scotland’s Global Restructuring Group by Yorkshire businessman Lawrence Tomlinson in a damning report last year. RBS has denied treating customers unfairly and commissioned its own report which cleared it of wrongdoing.
Lloyds told TheBusinessDesk.com it always uses qualified chartered surveyors who use the Royal Institution of Chartered Surveyors’ (RICS) “red book” [which contains mandatory rules and best practice guidance] definition of market value. Besides, “Lower than market values make no commercial sense to us,” said a spokesman.
But Manchester law firm Berg came to a similar conclusion to Mr Tomlinson after reviewing a number of cases for its own banking report.
Alison Loveday, pictured, managing partner and an expert in banking and financial regulation, said: “They don’t always use the red book, and they quite often use internal or drive-by valuations.
“Where it becomes particularly stark is if you’ve historically had valuers who know a property well and have done it on a red book basis, and at the time the bank is considering a covenant breach it’s all the more important to have a valuation from someone who knows the property. But they don’t go back to the same firm. I don’t doubt they’re on the panel of valuers but the assets appear to be valued on a different basis.”
In December 2013 Lloyds’ Business Support Unit packaged up Bredbury’s debts along with those of a number of other hotel companies, gave it the name Project East, and sold it in two tranches to Deutsche Bank and the US financial institution Cerberus Capital Management.
Cerberus’ Dutch unit, Promontoria Holding 87 BV, negotiated a 39% discount, paying £90m for outstanding loans with a face value of £147m. This was described as “distressed debt” but the Cerberus portfolio generated profits of £1m in the year to December 2012, according to a report from property title CoStar at the time of the sale.
A creditors’ report for Bredbury Hall shows Cerberus immediately got tough with its then owners, withdrawing an overdraft facility within months that was part of the original loan arranged in 2008. The hotel was not alone – the debt sale affected a string of other hospitality companies which between them owned 31 hotels. By April, 20 were in administration.
These venues were owned by the Bromsgrove-based Forestdale Hotel Group, with 14 hotels including Ardsley House Manor in Barnsley, and Hampshire-based Hollybourne Hotels Group which has five.
At the time the directors of Bredbury and Hollybourne had separately hired Manchester law firm Berg to take action against Lloyds for allegedly mis-selling a product that hedged against interest rate rises on their loans.
But when their businesses went into administration they lost control of these claims. Some administrators, which are often appointed by banks, have refused to release such claims but Berg won a landmark case in March for developer London and Westcountry Estates which forced EY to hand over the right to sue RBS over an allegedly mis-sold interest rate swap.
In the year to April 2013 Bredbury Hall made a pre-tax loss of £543,000 but it achieved a trading profit of £211,000, up from £119,000, after stripping out non-cash items such as goodwill and depreciation. Revenues grew by 6.8% to £5.3m, and EBITDA (earnings before interest, tax, depreciation and amortisation) was £1.27m up from £1.15m the prior year. The company’s outstanding loan was £11.2m.
Ross Finch, a former director and shareholder at Bredbury Hall, said: “This was a strong and resilient business that had not only survived the recession, but with the extensive financial and operational support of its directors and commitment from its loyal and hard-working staff, had actually grown significantly. In my opinion, the expiry of the overdraft facility was used to provide the opportunity to take the business away from the very directors who had supported it.”
In the case of the Forestdale, Cerberus sold a debt of £25.6m to St James’ Hotel Financing, part of London-based Somerston Capital, for an undisclosed sum. A day later it foreclosed and administrators were appointed, selling to another Somerston company, St James’ Hotel Properties, for £23.6m. Forestdale was owned by Plymouth Argyle chairman James Brent. He did not respond to an interview request but told the Plymouth Herald in March that Forestdale’s debt with Lloyds was being serviced.
‘It’s morally bankrupt but legally correct‘
At Hollybourne Hotels, where credit was also withdrawn, the management had earlier made an offer to Lloyds to settle a £16.6m debt. They then offered Cerberus £12m, but this was refused. Administrators at Zolfo Cooper said this deal would have left a “significant shortfall on its [Cerberus’] lending across the companies”, even though it could have generated a profit of £1.2m, based on Cerberus’ cut price acquisition of the portfolio. The hotels are still being run by administrators.
Former Hollybourne director David Knights told TheBusinessDesk.com: “Cerberus are particularly aggressive buyers of debt from banks. But a British bank that’s supposed to support business, that’s the real pariah as far as we’re concerned. We had a business loan for a five-year term and come the renewal time they decided they needed a new valuation. The effect of the recession meant hotel property values had crashed and it meant we couldn’t meet the loan-to-value covenant.”
The valuation fell from about £30m in 2008 to £16m, pushing the group into negative equity from a loan-to-value ratio of about 70%.
“[Lloyds] were absolute pariahs,” he said. “They had no loyalty. It would have been simple to continue the business loan and we would’ve continued to pay back as we had done with various Lloyds loans for 20 years. If they had renewed on the same terms they know they would’ve been repaid. It’s scandalous.”
Mr Knights’ colleague Tony Bailey said: “Lloyds just sold lots of loans to hedge funds at really cheap prices and they said ‘we want our money back’. That’s no different to Lloyds doing that to us. Our situation didn’t change because the name was Cerberus not Lloyds. We dealt with Lloyds for 35 years and never ever had a problem paying interest. We had negative equity – only because our value dived, not because of profitability… they sold our loan to Cerberus at way under what we offered to pay in March/April 2013.”
He added: “The year they took it away EBITDA was £1.6m. We had a long term loan and we were just paying it off. Our covenant said we couldn’t have loans greater than our value at that time. It’s morally bankrupt but legally correct.”
‘Lower than market values make no commercial sense to us’
A spokesman for Lloyds said: “Under the terms and conditions of a borrower’s loan agreement, the bank is entitled to sell the loan to a third party – the customer agrees to these terms and conditions when taking on the financing. Since 2011, the bank has had a well-stated strategy of de-leveraging non-core customer loans and assets, in order to strengthen the bank’s balance sheet and has reduced its balance sheet by more than £150bn during that time.
“When selecting which loans to de-leverage, the group takes into consideration the loan profile and its attractiveness to potential debt purchasers and whether the customer is one that remains core to the group.”
He added: “When valuing property assets, we appoint valuers from a panel of firms. These valuers are RICS qualified and determine the value of the asset based upon RICS’s ‘red book’ definition of market value. Lower than market values make no commercial sense to us, as this risks increasing the loss we will suffer.”
Referring to the mis-selling claim, he said the bank did not comment on ongoing legal matters.
‘Promontoria is playing an important role’
A spokesman for Cerberus said: “It is very important that your readers understand why banks sell non-performing portfolios to firms such as Cerberus’ affiliate Promontoria 87 BV. Owning non-performing loans is extremely costly for banks and hinders the recovery of local economies because owning non-performing loans prevents banks from lending. Promontoria 87 BV therefore is playing an important role in taking risk from banks so they can get on with lending – something that the economy greatly needs.”
He added: “Promontoria 87 BV at no point ‘withdrew credit’ from any of the entities you referenced. At the time the loans referenced were purchased, any overdraft facilities had already by cancelled by the selling bank, or extended for a period of time agreed with the borrower. Cerberus had nothing whatsoever to do with the origination or terms and conditions of such facilities.”
The spokesman went onto address each case.
He said: “The Bredbury Hall hotel was taken voluntarily into administration by its owners in the midst of ongoing discussions with our affiliate on how to restructure its debt. The owner and his fellow directors filed for administration. In order to protect its position Promontoria 87 BV exercised its rights and appointed its nominated administrator after the borrower’s commencement of the administration.
“During our discussions, the borrower failed to present a viable business plan for the hotel despite multiple opportunities to do so over the course of several months. The hotel continues to operate as a going concern during the administration process, serving guests and providing jobs in the community.
“The Hollybourne Hotels loan matured and became fully due and payable in July 2013, long before our affiliate acquired the debt. Promontoria 87 BV provided the borrower time to prepare a plan to repay its debt at a discount. Unfortunately, its proposal was insufficient, and as a result Zolfo Cooper was appointed as administrator in February 2014. The hotels are in the process of being sold but are still operating “business as usual.”
“The Forestdale Hotels loan also had a material shortfall of collateral coverage and the hotels were operating at a loss. Promontoria 87 BV sold its interest in the loan to an unaffiliated third party shortly after acquiring the loan. This third party then appointed an administrator. So, neither Cerberus nor its affiliate placed this group into administration.”