DealZone

The recent history of Britain’s eccentrically-named Slug & Lettuce pubs should make a sobering read for ambitious property investors with an eye on similar investments.

The chain’s woes began in 2005, when its then owner, the SFI Group, plunged into administration due to difficulties with its finances.

Its collapse triggered property tycoon Robert Tchenguiz to buy up the group’s best outlets and bring them into his Laurel Pub Company.

Three years later, it was the turn of heavily indebted Laurel to crash into administration, caught out by a downturn in the economy and difficult financing conditions. As part of the adminstration process Laurel split into two, with the Slug & Lettuce pubs placed into a new company, the Bay Restaurant Group, as part of its portfolio of 190 outlets.

Yesterday, Bay Restaurant agreed its second financial rescue in as many years, with banks agreeing a new 150 million pound loan in exchange for taking a stake in the company. The banks providing the rescue financing were Iceland’s Kaupthing and Germany’s Commerz – hardly strangers to rescues themselves.

With property markets stabilising and hopes that the worst of the financial crisis is behind us, Europe’s banks are now looking to resolve their next biggest problem: 225 billion pounds of loans backed by UK commercial property.

As Sinead Cruise and I wrote earlier today, banks are now organising to sort through this massive debt pile, picking the good from the bad, foreclosing on properties and selling off what they can.

“Lenders have long turned a blind eye to breaches of covenants as long as they met interest demands by collecting rents. But they are now abandoning this softly-softly approach as the British economy worsens, planning foreclosures on a scale not yet seen in this cycle.”