Recipe for Success

At the end of a long summer, Tragus Group, the owner of several UK restaurant chains, closed the door on a difficult spell for its brands Bella Italia, Cafe Rouge and Strada. In the difficult post-recession trading environment, the eateries faced mounting losses before credit specialist Apollo Global Management led a debt restructuring ensuring the continued operation of roughly 290 sites on a substantially healthier footing.

Apollo achieved the turn-around by securing the approval of other creditors including senior lenders York Capital Management, Deutsche Bank and Oak Hill Advisors, along with a majority of the restaurants’ landlords – smaller creditors of the group. This was managed through a series of company voluntary arrangements (CVA), a UK procedure whereby companies struggling with debt or facing insolvency can reach a work-out agreement with creditors.

Apollo, which declined to comment, provided a lifeline of £200 million in debt and equity. No legacy debt remains, according to a source.

Group debt was reduced by around £267 million from £358 million to £91 million. Included in this amount, two publicly traded Eurobonds with £73 million outstanding were delisted. Strada, one of the group’s upmarket restaurant chains, was sold for £37 million to private equity group Sun Capital Partners, run by Hugh Osmond, co-founder of UK pub group Punch Taverns. Capex funding of £110 million was put in place to invest in the existing estate and acquire a significant number of new sites for the remaining Café Rouge and Bella Italia brands. Apollo, which originally committed £20 million pre-approval, presumably increased its commitment.

Taking a chance where previous owner Blackstone had stumbled, Apollo’s partnership with specialists in both UK leisure and hospitality and insolvency law, goes some way to explaining how it got comfortable with the deal.

Financial advisor Zolfo Cooper and law firm Kirkland and Ellis advised Apollo from late 2013 when it acquired an initial tranche of Tragus debt, PDI understands. Shortly after, it bought a controlling stake comprised of £250 million (par value) senior and mezzanine long-term loan tranches on the secondary market, originally syndicated by Barclays Capital. With a blocking stake in place, Apollo was able to seize control of Tragus from incumbent sponsor Blackstone in March 2014 before initiating the restructuring in June and paving the way for its debt for equity swap in October.

Illustrating the high esteem in which Leon Black’s firm’s approach to debt for equity swaps is held by its peers, a senior US restructuring lawyer told Private Debt Investor in March 2014: “I can’t tell you the number of clients that have come to me and said, ‘I want to do it the way Apollo does it’.”

So is there any mystery in how Apollo executes? Certainly Blackstone, which bought the group in 2006, failed to turn the company around. A recapitalisation of Tragus by the sponsor in 2012 only precipitated further losses. However, an industry source jokes “there isn’t any dark art” involved in Apollo’s approach. “Blackstone just wanted to exit,” he says, adding: “[Apollo] got comfortable that they could invest at a price that was attractive to the seller.”


A company bought at the peak of the cycle, exhibiting deteriorating performance under a complicated and increasing debt structure, is a familiar story from the years following the global financial crisis. Tragus, which declined to comment, looked like yet another casualty unable to handle its debt pile when the economy soured.

In October 2013, Tragus’s use of Eurobonds to reduce its tax bill attracted negative publicity as the general media turned its sights on corporate ‘tax-avoidance’ structures.

Popular amongst private equity groups, the instrument allowed Blackstone to invest in the equity of Tragus via debt. Using debt enabled Blackstone to avail of a 20 percent tax break from HM Revenue & Customs. Introduced 30 years ago, relief on debt interest payments has reduced tax paid by business owners to pay by millions of pounds, according to a report in The Independent.

The Tragus Cayman Island-listed bonds came with a hefty interest rate of around 17.4 percent. In April 2007, £26.3 million 2016 notes were issued. Then in October 2008 the borrower issued £12.9 million 2018 notes, according to company reports. The outstanding amount on the bonds grew to total roughly £73 million by June 2013 and had the effect of increasing losses on the company balance sheet.

But this was not the key cause of Tragus’s troubles, according to sources. The debt service burden is a “red herring”, said one. The real problem was the acquisition of Strada in 2007, it’s claimed.


Blackstone bought Tragus from UK private equity group Legal and General Ventures for £267 million in 2006. It backed the existing management team, led by chief executive Graham Turner, who also became significant investors in the company. At the time, it was one of the leading casual dining restaurant operators in the UK with more than 160 sites, its core brands being Café Rouge and Bella Italia.

The following year Tragus bought Strada, an Italian restaurant chain comprised of 50 sites, for £140 million. Blackstone had just lost out in a bidding war for La Tasca and moved to acquire Strada at the height of the cycle in line with its strategy of building a multi-branded restaurant group. Marketed as complementing the group’s existing brands, Strada’s ‘premium position’ was, in hindsight, off key with Tragus’s existing chains.

“Strada was expensive. [Blackstone] put a lot of investment into the Strada estate for the rollout of the Strada brand but the consumer didn’t take to it. [Blackstone] pumped a lot of capex investment into it but it was Café Rouge and Bella Italia that needed the investment,” says an industry source.

Another source close to the company noted: “The Strada business plan called for a rapid site roll out, taking the brand across the UK. Despite considerable investment, the majority of the new sites failed to deliver the anticipated return on capital putting a strain on the whole business.”
To avoid a potential breach of its bank debt covenants, Tragus refinanced in 2012 and Blackstone invested £15 million to reduce the debt burden. Graham Turner left the business and was replaced with John Derkach, former boss of beverage chain Costa Coffee. However, despite a small increase in sales, Tragus made a pre-tax loss of £36 million in the 53 weeks to 2 June 2013, double the previous year’s losses at £18 million.

According to a statement from Zolfo Cooper this November: “A relative lack of investment combined with a shift in customer demand from premium to casual dining in recent years meant that the business was generating negative like-for-like sales and declining EBITDA.”


In May 2014, Zolfo Cooper was engaged by Tragus to review the group’s options and assist with the restructuring process. The decision to off-load Strada was made.

Zolfo Cooper’s restructuring services team was later appointed joint supervisors on the CVAs for Bella Italia, Café Rouge and the sale of Strada. They were completed in June 2014.

For approval, the Apollo-led proposal [see boxout] needed the support of 75 percent by value of the group’s creditors with voting rights and 50 percent by value of all unconnected creditors, the majority of which in this case were its landlords. The deal secured support from around 85 to 90 percent of all creditors.

Ahead of the Strada sale, Zolfo Cooper introduced a senior management team, including new chief executive Steve Richards, with experience of implementing successful roll-out programmes and operational improvements in the restaurant sector.

“This significantly increased competitive tension in the process and ensured the business traded impressively in the run up to completion,” a statement read. Strada was sold for a value in excess of 7.5x EBITDA “comparable to the prices paid for some of the leading businesses in the leisure sector”, continued the statement.

As a result of the group’s reorganisation, Tragus’s debt as well as rent on a number of its 200 remaining restaurant sites was reduced. The Café Rouge and Bella Italia portfolio will receive capex investment through capital available for the acquisition of a “significant number of new sites”, according to a statement from Tragus.

Paul Hemming, head of Zolfo Cooper’s corporate finance team, told PDI: “The site portfolio include[s] a number of fabulous locations. With the right investment there is no reason why these businesses shouldn’t return to former glories.”

Thus the resurrection of Tragus was simply a combination of nimble lender, with an extensive track record in distressed investing, teaming up with sector specific advisors, working together to maximise value.

Recently, Apollo appears to have opted to bake-in these advantages. In October, the distressed investor announced the formation of Alteri Investors with Gavin George, the former boss of retail restructuring specialist GA Europe.

The formal joint venture will invest in the debt and equity stakes of struggling UK and German retailers. In the UK and further afield in recession-torn Europe, Apollo hopes to deploy its winning Tragus recipe again.