Deal to refinance gym and tennis club chain's �365m debt pile likely to cost tycoons Ian and Richard Livingstone millions
David Lloyd Leisure, one of Britain's largest gym and tennis club chains, is facing a painful refinancing of its towering �365m debt pile in a deal likely to wipe out millions invested by property tycoons Ian and Richard Livingstone.
The business's debt burden is a legacy of a controversial takeover backed by Bank of Scotland just weeks before the credit crunch brought an abrupt end to a glut of leveraged buyout deals.
The latest accounts for David Lloyd show the group's losses more than doubled from �34.8m to �82.2m last year. Meanwhile, the company's balance sheet sank further into the red, with the net deficit ballooning 75% to �189m ? including �26m of current liabilities.
Directors insisted they were "pleased with the performance", noting that turnover had been broadly flat at �319m. The chain opened its 90th club, in Farnham, Surrey, last year and another opening in Worcester is scheduled for December.
But a more gloomy picture emerged in the small print to the accounts. "The current economic conditions create uncertainty particularly in relation to membership levels and property values."
The directors warned that even after a string of cost cuts, the group, which employs 4,500 staff, will only narrowly stay within its banking covenants in the next 12 months. During that time it is keen to thrash out a debt restructuring before loan covenants tighten further.
The business was bought in August 2007 from leisure conglomerate Whitbread in a �925m joint venture backed by the Livingstone brothers and Bank of Scotland. The bank took an equity stake as well as providing the acquisition debt financing.
The clubs were merged with Next Generation Clubs, a rival business run by Scott Lloyd, whose father ? a former British tennis professional ? had founded the David Lloyd chain that bears his name, selling it in 1995 to Whitbread.
Ballooning balance sheet liabilities include �183m in loan notes held by the group's own shareholders. These notes attract interest at 13% a year, though the interest is rolled up and does not fall due until 2017. Before then, however, any refinancing deal with the group's banks is almost certain to see the value of these notes reviewed.
The 2007 purchase of David Lloyd was one of the largest deals entered into by Peter Cummings's corporate banking division at Bank of Scotland, then part of HBOS. Just over a year later, however, crisis-stricken HBOS was effectively rescued from collapse in a takeover by Lloyds, with the taxpayer forced to take a 40% interest in the enlarged group.
Cummings's division was the subject of an investigation by the Financial Services Authority after the enlarged bank ? renamed Lloyds Banking Group ? was forced to more than double its bad debt provisions from �3.3bn to �7bn. In March this year the regulator concluded the division had been guilty of "very serious misconduct".
Last month Cummings, who has retired from banking, was fined �500,000 after being found to have led a "culture of optimism" at HBOS which left the bank slow to spot looming bad debts.
After the gym club deal was signed, Andy Powell, the banker who led the Bank of Scotland's investment, said: "We are delighted to be part of this landmark deal. This deal represents a fantastic opportunity to consolidate the two pre-eminent racquets, health and fitness clubs in the UK, creating a clear market leader in premium health and fitness."
Lloyds Banking Group's distressed stake in David Lloyd Leisure was sold, along with a parcel of other investments from Cummings's Bank of Scotland division, to distressed debt group Coller Capital in a �332m deal two years ago.
Powell still acts as an adviser on the David Lloyd investment, despite the bank having sold its interest. He also continues to sit on the David Lloyd Leisure board. His continue involvement stems from his role as a partner in Caird Capital, set up by fellow former Bank of Scotland banker Graeme Shankland, to advise on some of the bank's former investments.
Source: http://www.guardian.co.uk/business/2012/oct/09/david-lloyd-leisure-painful-refinancing-debt
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