EUROPE NEWS: Pre-pack Keith

Breslauer’s Patron Capital acquired a portfolio of hotels out of administration last month (at the same time as he ascended Yosemite’s El Capitan. PERE Magazine November 2011 issue.

Keith Breslauer, founder of Patron Capital, is not ascending peaks such as El Capitan in California’s Yosemite National Park for charitable purposes, his opportunistic firm is busy digging out distressed deals. Last month, the London-based firm acquired some 24 hotels for £40 million (€46 million; $61 million) from Grant Thornton, the administrator that took over Jarvis Hotels on 30 September after the company ran into financial difficulties following two leveraged buyouts.

One of the lenders to Jarvis was Royal Bank of Scotland, the quasi-nationalised British bank. The other original lenders were HSBC and Bank of Ireland, which along with RBS lent fresh money to Patron for the buyout via its investment vehicle, Jupiter Hotels Limited.

Having assembled a team of four dedicated hospitality professionals, Patron is betting that banks will need or want to offload such assets first. “The British and German banks are going to focus on selling their non-core assets, and hotels often fit that category,” Breslauer told PERE in an interview.

What makes this particular acquisition so interesting is that Jarvis Hotels had entered into a so-called “pre-pack” administration, which is a process in the UK that allows a company to recover to a healthier state. To get there, the pre-pack includes the proviso that leases can be handed back to landlords without financial penalty, which is why it has become unpopular among property owners. In addition, the pre-pack process involves trying to agree to a plan with creditors of the company in advance.

“The theory allows for a very quick restructuring of the business, as opposed to a long, drawn-out process,” Breslauer said. “This is particularly important in the hotel business, where the odds of a bankrupt business recovering are very low. Hotels are not like offices. If there is no capital expenditure and you cannot pay staff or honour contracts, it collapses. Our deal effectively was backing a management team and buying them out.”

The Jarvis portfolio contains two types of hotels: country houses and mid-market business hotels catering to conferences throughout the UK but located outside of London. As well as avoiding many expensive leases, Patron and its joint venture partner, West Register (part of the global restructuring group of Royal Bank of Scotland), were able to change the management contract to the Mercure brand run by French group Accor, which contributed to the investment.

“The deal is a good example of a hotel business, which at its core is a good one,” Breslauer said. “However, it was subject to two leveraged buyouts, so the debt and liabilities shot up. In addition, on the business side, they didn’t spend much on the properties.”

Meanwhile, Patron has been linked to the sale of a £1 billion portfolio of loans by Lloyds Banking Group. Breslauer played down the notion of such a large-scale deal, although financing would not be a problem given that his firm reputedly is raising capital. “We are working with Lloyds on a range of potential transactions – at least four or five,” he noted.