Orchid property arm close to breach

Recently published accounts from Orchid Group, the managed bar and pub-restaurant operator backed by GI Partners, reveals its property arm is in danger of breaching a banking covenant, according to M&C Report​.

The firm's auditor KPMG flags up concerns over its ability to continue as a going concern, given how close it is to breaching a covenant relating to a loan-to-value test.

The concern relates to a company called Orchid Pubs Properties Ltd, a vehicle used to hold the company's pub assets — a so-called "propco". This company has debt of £453.75m.

According to the covenants agreed between the company and its banks, its debt figure must not exceed 82.5% of the value of the group's properties.

However, the last time the test was carried out — on the 21st of April 2008 — the debt was perilously close to breaching this level, at 82.38%.

The accounts, published in October, express concern over future tests. It states: "Given the current uncertain market conditions and the narrowness of the current headroom on this covenant, there is material uncertainty over whether future valuations will continue to support a pass of the covenant test."

Valuations can be called at any time by Orchid's banks if they believe there is a position of default.

The ratios are based on property valuations carried out by property agent DTZ. Its previous valuation, in January 2008, resulted in a loan-to-value ratio of 82.30%.

KPMG concludes: "In view of the above matters there is material uncertainty casting significant doubt over the ability of the company to continue as a going concern and therefore, to be able to realise its assets and discharge its liabilities with normal course of business."

The accounts show that the division made a loss of £15m in the year to 31 December, 2007.

Orchid Pubs — the operating company and parent company of Orchid Pubs Properties — made losses of £46.2m.