As Icon falls, spate of pub receiverships predicted

The spectre of more pubs going into receivership has been raised by the appointment yesterday of the receiver Ferrier Hodgson to the Icon Hospitality group, which runs nine pubs in Sydney.

By InvestSMART · 21 Jan 2011

By InvestSMART ·
21 Jan 2011

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The spectre of more pubs going into receivership has been raised by the appointment yesterday of the receiver Ferrier Hodgson to the Icon Hospitality group, which runs nine pubs in Sydney.

The owners of the hotels, ING Real Estate Entertainment Fund, said the pubs, including the Dolphin in Surry Hills and the Commodore in North Sydney, are leased to Icon and represented about 39 per cent of the fund's annual lease income.

The ING fund recently sold the Bourbon Hotel in Kings Cross and the adjacent Club Swans to Chris Cheung for $22 million, about $30 million less than what it paid for them. Icon remains the manager of the hotel.

It is believed Icon, run by the hoteliers Damien Reed and Peter Wynne, owes the Commonwealth Bank close to $60 million, after it was hit by falling property valuations and rising interest rates.

The ING fund's chief executive, Daniel Hargraves, said the fund had received confirmation that the appointment of receivers to Icon "will not constitute an event of default under either of [ING's] senior debt facilities while the receivers and managers observe the lease obligations".

He confirmed that the fund would make a conditional offer to Icon's receiver.

The pub operator Paddy Coughlin, managing director of Riversdale Group, which is building up a distressed pub fund with John Singleton, said the corporatised leasehold market that emerged after the "easy credit/low yield" boom in 2005 "has been an inevitable disaster".

"This ING/Icon situation has been a problem for two years,and this long overdue reactive approach from the [Commonwealth], and indeed the ING fundas landlord, will result in massive losses for shareholders and willput further pressure on pub valuations generally. Ferrier's last pub appointment resulted in the Landmark Leisure group, which was placed in receivership with $95 million in debts, realising only around $55 million after the assetswere sold.

"Make no mistake, banks that are sitting on impaired credit files will now be compelled to appoint receivers to protect asset value."

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Frequently Asked Questions about this Article…

What happened with Icon Hospitality that led to a receivership?

The receiver Ferrier Hodgson was appointed to Icon Hospitality, the operator of nine Sydney pubs, after the business was hit by falling property valuations and rising interest rates. The article reports Icon owes the Commonwealth Bank close to $60 million, which prompted the appointment of receivers.

Which pubs and assets are directly affected by the Icon Hospitality receivership?

Icon runs nine pubs in Sydney, including the Dolphin in Surry Hills and the Commodore in North Sydney. The ING fund had also recently sold the Bourbon Hotel in Kings Cross and the adjacent Club Swans to Chris Cheung for $22 million; Icon remains the manager of that hotel.

How does the Icon receivership affect the ING Real Estate Entertainment Fund and its investors?

The ING fund said pubs leased to Icon represent about 39% of its annual lease income. ING’s CEO confirmed the appointment of receivers to Icon "will not constitute an event of default" under ING’s senior debt facilities while receivers observe lease obligations, and the fund said it will make a conditional offer to Icon’s receiver.

Could the Icon receivership signal more pub receiverships and falling pub valuations?

Yes. Industry figures quoted in the article say the corporatised leasehold model that grew after the 2005 boom has been problematic and that banks sitting on impaired loans may be compelled to appoint receivers to protect asset value — a situation that could put further downward pressure on pub valuations and lead to more receiverships.

What precedent was cited that shows recoveries can be much lower than debts in pub receiverships?

The article cites Ferrier Hodgson’s last pub receivership of the Landmark Leisure group, which had about $95 million in debts but realised only around $55 million after assets were sold — illustrating that recoveries can be significantly below outstanding debts.

What role are banks like the Commonwealth Bank playing in this situation?

The article notes Icon reportedly owes the Commonwealth Bank close to $60 million. It also states that banks with impaired credit files may appoint receivers to protect asset value, which is exactly what happened in the Icon case when Ferrier Hodgson was appointed.

What actions has the ING fund taken in response to Icon’s financial problems?

ING’s chief executive confirmed the fund received assurance the receivership would not trigger a default under its senior debt while lease obligations are observed. The fund has also said it will make a conditional offer to Icon’s receiver as part of its response.

What does this situation mean for everyday investors considering pub leasehold or property funds?

The article highlights risks for investors: corporatised leasehold structures can lead to concentrated exposure (the ING fund had 39% of lease income tied to Icon), falling property valuations and rising rates can strain operators, and forced receiverships may result in significant losses for shareholders and downward pressure on valuations. These are factors everyday investors should be aware of when assessing pub or leasehold property exposure.