The restructuring of the Alternative Hotel Group, which encapsulates the biggest quantum of debt among the loans made by HBoS into the hotel space, lays a clear marker for how Lloyds is prepared to tackle its inheritance from the troubled Scottish bank.
It can be seen as either the ultimate "amend and pretend" or as simply the most rational way for Lloyds to recover the maximum it can from the over ambitious original deals.
The total debt in Alternative Hotel Group, which encompasses the former De Vere Hotels assets such as the midmarket hotel and health clubs concept Village, the Green fitness clubs, distiller G&J Greenalls and catering company Searcys, plus the former Initial Style conference centres, now dubbed De Vere Venues, is around the £1.7bn mark.
The restructuring has seen £600m to £650m of the debt converted into zero coupon preference shares, wiping around £60m a year off the interest bill. The banking facilities have been extended until the end of 2013 with the press release issued by AHG stating "further funding is being made available to help grow and develop certain parts of AHG".
The original equity in the deal, split 50:50 between the AHG management team led by Richard Balfour-Lynn and Uberior Ventures, the HBoS equity funding vehicle that backed the deals, has been left in place, if now subordinate to the preference shares. Debt covenants have been reset in line with the restructured facilities.
Brought in to oversee the restructured company is Andrew Coppell, who has joined as chairman. He was chief executive at Queens Moat Houses from 1993 and for 10 years oversaw the attempts to resurrect value in that collapsed chain. Also brought in as a non-executive director is Nicholas Bull, a former Morgan Grenfell investment banker.
Richard Dakin, managing director and head of corporate real estate, business support, at Lloyds Banking Group, said: "The refinancing positions the group well for the current trading environment and provides a platform for AHG to realise its full potential in the coming years to the benefit of all stakeholders."
Richard Balfour-Lynn, CEO of AHG, said: "I am delighted with the successful outcome of our discussions with BoS. This clearly shows how companies and their bankers can work in partnership to create a financial structure that enables a sound business such as AHG to grow and prosper in an entirely different banking and economic environment."
Initial Style was bought by AHG in 2005 from Rentokil for £325m. AHG won a bid battle against private equity house Permira in June 2006 to acquire De Vere Hotels for £1.1bn.
HA Perspective: It is somewhat cynical to use the phrase "a rolling loan gathers no loss" in the context of this latest restructuring but it suits both parties not to force a permanent solution in the current market.
The new arrangements have a deadline of less than three years and Lloyds will want to see the preference shares paid down as soon as possible given that they are effectively an interest holiday on more than a third of the debt.
What the deal has done is to give the company a chance of viability. Sources within the industry suggest EBITDA is around the £80m to £90m mark and would have been insufficient to pay the interest on the original capital structure.
By not taking ordinary shares and forcing the management to dilute their stake, Lloyds has avoided having to consolidate the company and take it on its books. But the devil will be in the detail of the new shareholder agreement. This must surely have left Lloyds in charge of the big decisions with the new chairman Andrew Coppel seen as the safe pair of hands to protect the bank's interests.
Coppel's job is going to be tough, managing the tension between the management team's desire to grow and Lloyd's desire to see disposals to repay the preference shares and see more of the debt paid down.
The reaction of the management team to the restructuring has been close to euphoric. But there is no easy road out of the debt mess. The property bubble on which AHG was built has burst and it will be many years – many hope never – before the easy credit conditions that financed the original deals will return.
This means that the management team will almost certainly be reliant on whatever kickers Lloyds has seen fit to leave in the new shareholder agreement. It will take one heck of a recovery for the original investment to be back in the black by the end of 2013.