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Morning Briefing Strap Line
Fri 1st Mar 2013 - Friday Opinion
Subjects: Interest rate swaps, craft beer bars, the Hospitality Guild and external perspectives
Authors: Mike Lloyd, Christian Townsley, Suzy Jackson and Ann Elliott

How Barclays sent us bust in four short years by Mike Lloyd

My company Sarumdale was established in 1991 by Rodney Hall with me joining in 1996 full time having been an investor. We have 70 years experience of the pub trade between us.

When Sarumdale began it was backed by Barclays Bank and it remained our banker throughout. The company started with leased properties with Inntrepreneur and by 1996 we had around 12 sites split between Bass leases and Inntrepreneur. 

In March 1996, private equity firm 3i invested in the company allowing us to move forward and start to buy freeholds. We bought a few freeholds and in late 2000 the opportunity to buy the freeholds of the Inntrepenuer sites (seven in total) came our way. This was a huge opportunity that Barclays agreed to fund. The loan was around £3.2m and was funded by a simple agreement for five years with a straightforward, easy-to-understand floor and cap – the floor was 5% and the cap was 8% cap. No problem.

We purchased further freeholds between 2001 and late 2004 taking the company to 21 sites, nine leased and 12 freehold, always being very selective about our acquisitions. During this period we obtained backing from Barclays to buy back 3i’s share of the business and take it under our sole control. Between 2005 and 2007, the company had an annual turnover of around £8.5m and EBITDA of circa £1m.

The original five-year finance on the seven sites purchased from Inntrepenuer came to an end in late 2005 and the bank started to discuss this with us. We were told we could save money with a new deal – and around this time we found a new acquisition in Hailsham and asked the bank to fund it. Barclays agreed. Our relationship manager advised us that rates were at historic lows and there was concern they were going to rise and it might make our ability to finance the loans difficult when this happened. We had to be “protected” against this. The bank would arrange for an expert advisor to come to see us from Barclays Capital. The advisor from Barcap told us he would get us the best deal possible. We were presented with the “best deal” which was a “structured cap and collar”. This would cover not just new borrowings but all existing finance. It was made a term and condition of our funding that we entered into the aforementioned deal, lasting ten years. We were totally dependent on Barclays for finance and, without it, had no business. We were not told that should interest rates fall substantially we would be left with crippling levels of charges. Or indeed should we need to terminate the agreements we would face substantial costs to do so. 

We acquired a further site at the end of 2006 and again had to enter into a further “ structured cap and collar” to finance this. We now operated 23 sites across the south east employing around 230 full and part time staff.  The smoking had an impact on the business from its implementation in 2007 - but not one that could not be dealt with. 

In late 2008, interest rates fell to below 4% and at this stage we began to be charged costs by the bank under the swap agreement. We had no idea that this would happen. This caused a slight cash flow problem but became dramatic when rates fell to 0.5%. The additional payments due rose to more than £320,000 per year as a result of the “swap” we had been compelled to enter. We attempted to move bank but couldn’t due to the contingent liability arising from the swap.

We were instructed to sell some properties to reduce the borrowings during the early part of 2010. We agreed to do this. Unfortunately, as the banks were not lending to buy pubs or many other businesses, the properties took two years to sell. Selling the properties only reduced the debt to the bank. It did not reduce the liability of the company for the structured cap and collar. This liability remained constant.

We were trapped. By late 2011 we were under serious cash flow pressure. We had disposed of all the tied leased properties we occupied, and had sold a freehold property. We still had three further freeholds on the market, which subsequently sold in early 2012. 

In January 2012, Barclays proposed that they refinance the company and provide new loans to allow us to buy out the cap and structured collars. This was despite the fact that we were selling property and paying down the loans as a result. The sales generated, eventually, £1.4m. We were not permitted to use any of the funds received from sales to buy out the swaps. We agreed to the proposed new loans as we had no alternative. This was the only way to see light at the end of the tunnel. By late May 2012, we had 12 sites remaining, had moved and sold our office base, made our general manager redundant and exited loss-making sites. As a result of these actions, exiting the cap and collars would have improved the situation by around £500,000 Ebitda per annum.

During this time we had, as a result of the costs imposed on the company, fallen into arrears with HMRC, which had been aware of the situation and, to give credit, been extremely understanding and patient. We informed HMRC of the steps taken by us and that in buying out the swaps, we would be proposing a CVA payment scheme to them and our creditors. We had discussed this with the company’s advisors who the bank “invited” us to appoint. The funding to refinance and “buy out” the cap and collar finally arrived in mid-May. We asked that the proposed CVA be presented by our advisors to HMRC.

On 29 May 2012 we finally drew down the funds of circa £7.7m to refinance and exit the cap and collar - the exit fees for which were £949,000. This cost an additional £77,000. The company debt was moved to an on demand facility. However, we breathed a sigh of relief as we now only had the CVA agreement to resolve and we could start to rebuild slowly after nearly four years of stress, pain and sleepless nights. 

For some reason, which even today we can’t get to the bottom of, the CVA proposal we had asked the appointed company advisors to present to HMRC did not get presented – and, as a result, HMRC lost patience and issued a winding up procedure some four working days after our refinance. The bank withdrew support the following day and six days later placed the business into administration. 

We had fallen from a healthy, profitable company to a company in administration within four years solely as a result of the “structured cap and collars”, sold to us as a condition of finance. We were and remain devastated by this and are attempting to start a new business within the licensed trade, not least because the licenced trade has been our working life. 

There has been an investigation into the mis-selling by the banks of interest rate swap agreements by the Financial Standards Authority, the most toxic of which are structured cap and collars. The FSA’s findings are that 90% of the sales so far reviewed have been mis-sold. Redress has to be provided by the banks to put the companies affected back to the position they would have been in had they not been mis-sold. 

There are, however, criteria applied to which companies are entitled to redress: sophisticated and unsophisticated companies. If your company exceeds two of the three sophistication criteria, you are excluded from the scheme and must take legal action. The criteria are: turnover in excess of £6.5m, more than 50 employees and a balance sheet worth in excess of £3.26m. We are therefore “sophisticated”. The criteria are, of course nonsensical - you can’t run 23 pubs with under 50 staff. 

We are now reliant on the administrators taking legal action against the bank unless there is a further review of the FSA redress scheme.
Mike Lloyd and Rodney Hall who founded Sarumdale are now both unemployed and looking to start a new pub co

Progress at the Hospitality Guild by Suzy Jackson

It’s my first year anniversary today - first year with the Hospitality Guild that is. We’ve had a phenomenal year (okay, I’m biased). The timing for an umbrella organisation for hospitality that is focused on staff has never been better, of course, against a backdrop of 2.5 million unemployed - and a scary one in five young people in the UK being either unemployed or not in full-time education.

If you’re reading this you need no persuasion that hospitality is a sector that offers plenty of jobs and career opportunities. It’s highly likely you agree with The FT, which said in January this year: “A problem faced by the industry is a lack of awareness in schools and among careers advisers of the career opportunities. Part of the problem is the bewildering array of organisations representing the industry and the plethora of qualifications employees can earn.”

Put all this together and you can see why the Hospitality Guild was set up, with £1.75m of government backing, both as an umbrella industry organisation and to reduce confusion. We are working to create a single industry portal that brings employers and would-be employees together. I believe passionately that by unifying the industry, raising standards, simplifying our message and showcasing what we do in one place, we really can promote the positive profile of the industry.

Turn the clock back to last year, though, when we started this journey. Comments like, “Good luck with that then” and “the politics will beat you” were pretty common. Only last week a good industry friend said, “I remember you agonising a year ago if this could be done and look now”. Twelve months later we have, under our belt, 23 professional bodies working together, tangible results from our initiatives, £1.1m funding towards ‘Hospitality House,’ and a successful awards event to showcase the industry at the House of Commons.

This week, we proudly launched an initiative with Pub Perceptions, chaired by Beds and Bars managing director Keith Knowles, to offer 15,000 work placements to young people. The beauty of this is what we achieved by bringing together those who could help - Job Centre Plus, People 1st, BII, CPL Training, and, of course, operators.

We’ve also just launched our Act NOW! on apprenticeships campaign, fuelled by two conversations and our first Apprentice Awards, which provided the pleasure of meeting some truly inspirational youngsters. It was an esteemed operator of a medium-sized multi-site operator who told me he was desperate for apprentices but couldn’t find them. A second employer argued, “Until you give me one piece of paper to fill in and then an apprentice turns up, it’s too complicated.” I couldn’t agree more!

Well, I can’t promise we’ve gone as far as one piece of paper, but I can promise we’ve set out to make things easier.

Act NOW! lays out five simple steps for employers, job seekers and training providers. Like many employers, I wouldn’t have known where to start with apprenticeships. The information has always existed but, by crikey, you had to really want it. Speaking to employers I think those who’ve had bad experiences had tried the wrong solution, or didn’t have the right information, which is the bit the Hospitality Guild can help with.

Only 5% of Hospitality businesses take on apprentices but 45% more would if they knew how to. Let’s hope this campaign goes a long way to supporting those businesses and eroding that 2.5 million unemployed figure. We’re keeping the momentum of 2012 going this year, starting with two high-profile innovations.

Online, we’ve just launched the brochure site of our web portal. By the end of April, this will give individuals and employers everything they need in the areas of careers, recruitment and development in the industry.

Physically, we’ll open Hospitality House in June, a state-of-the-art £1.3m training and development hub in London. We’ve achieved this with the support of industry leaders such as McDonald’s, who donated the space rent-free, Compass, Electrolux, Heineken and many more. It’s on its way to becoming a tangible example of the industry working together for one common aim -and that’s what the Guild is all about.
Suzy Jackson is executive director of the Hospitality Guild and former director of central operations at Punch Taverns

Speciality beer bars by Christian Townsley

We opened North Bar in 1997 in Leeds as perhaps the UK’s first speciality beer bar. Many cities now have several speciality beer bars - Leeds itself probably has half a dozen venues that would put themselves in that bracket. 

In the 15 years since we opened the internet and social media has developed at breakneck speed. This had led to potential customers far and wide having access to products and knowledge, and with that it has become much easier for operators to sell niche products way beyond the high street. We were the first place to sell Erdinger on tap in the UK - at the time cloudy German beer was so alien to the public we were met with quizzical looks most of the time. These days it is so much easier to introduce new products, as general beer knowledge and awareness is at a much higher level than it was back then. 

We do think though, that there will be a point of saturation and only the best operators will thrive. If we believe in the quality and integrity of a product and feel there’s a demand from our customers, or that it fits in with our range, then we’ll sell it. We believe that it’s important to strike a balance between the obscure, limited edition products and bigger brands. We stock brands like Duvel, Erdinger, Sierra Nevada and Thornbridge. They’re all readily available in many major supermarkets and other retailers, and we’re okay with that! It is an inevitable result of the success of a brand that it will pop up on a supermarket shelf eventually - it would be naive to ignore that the aim of some of the bigger breweries is growth in volume and supermarkets play a part in that. 

If customers recognise beers in the supermarket that they’ve seen in our venues, try them at home and are enticed back to us to experiment with other brands, then we benefit from the exposure too. The major brands we sell are both a great springboard for customers who haven’t experienced some lesser known beers and also are generally lower in price than some obscure 75cl bottle, of which there’s only one pallet in the country! 

It’s important to us that our range is economically accessible and excellent quality, and it’s almost impossible to offer ‘affordable’ beers without having some of the better known breweries (Brooklyn, Schneider, Chimay to name a few) represented. 

We’re happy to leave the elitism to the chasing pack of ‘speciality beer bars’; let them fight over that single case of Imperial Black IPA from some nano brewery in Mexico that is retailing at £150, because, while they stock it proudly, and their customers wince at the £20 price tag that comes with their 33cl bottle of beer, their customers will ultimately either be disappointed or move on to the next beer or bar. Of course it is great to have that beer, but it won’t generate any loyalty, as it’s not economically sustainable for most customers. 

The balance between having a range of exclusive beers and some ‘staples’ is crucial to us, because we don’t want to be a beer tourist spot, we want to be a great bar. Most of our customers just want to walk into a great bar and have a nice drink amongst decent people! That is ultimately what we aim to offer. However, it is frustrating when we spot beers in the supermarket cheaper than we can buy them!

Having a really well trained team who offer excellent service alongside informed advice about beer is what we are all about. We like our range to represent a good cross section of all products, but this has to be backed up by our staff’s product knowledge and their ability to find the right drink for every customer.

Beer is a very important part of what we do, but we pride ourselves on being passionate about everything from good quality coffee to amazing cocktails, with excellent service to boot! We offer simple, good quality food such as cheese and meat boards or local pies - eats that work as a really good companion to a brew and complement our range, as well as lining the stomach!

North Bar turns sweet sixteen this year and we’ll continue to work closely with importers and suppliers so that we can continue to stay in the leading pack without becoming elitist and alienating our regulars, who aren’t all beer buffs! We’ll carry on evolving, rather than reinventing ourselves.
Christian Townsley is a director of North Bar, which operates four sites in Leeds. It is planning to open new sites in Otley in June and Oakwood, Leeds in the summer

The benefits of external perspective by Ann Elliott

On Wednesday night, at the Retailers Retailer awards, someone (a supplier not an operator) asked me what we did. I said that we created demand for operator brands. Simple as that. ‘Well,’ he said, ‘That’s not very tangible’. What? Not tangible? There is nothing more tangible than increasing footfall and being able to demonstrate that we do that. If we can’t prove that we are successful then why would people work with us and continue to work with us?

For some clients we have to start with the basics working with them to have total clarity on their offer, positioning and Unique Selling Point. It’s not that they don’t know what these are - it’s just that day-to-day operations (and survival sometimes) means they have forgotten (probably too strong a word) what these were when they started up. Going back to their original dreams and aspirations usually gives the focus and direction they need.

For some, they want insight to sense check where they are now versus where they wanted to be. They want to know what customers think and feel now, particularly in a rapidly changing and highly competitive world. They need to explore what their customers and potential customers want/need and expect from their brand and how they are delivering against these wants, needs and expectations. They don’t just want research in its basic form - they want real, genuine insight with a view on what they need to stop, start and continue.

A number of clients want us to translate this insight and knowledge into strategy – it’s not that they can’t or don’t want to do this. It’s just that sometimes it’s useful to have an external and objective view, free from baggage, on their strategic marketing options. We write their marketing strategy and marketing plans, which they implement or we can implement for them.

Some clients want to work with us on developing their offer particularly in terms of their menu and food – they want to know they have everything aligned. Again, it’s not that they can’t do this, it’s often that they don’t have the opportunity (or time) to step back and consider what they do from an objective point-of-view. They want a fresh pair of eyes, fresh thinking and fresh input from people who do understand the market, their competitors and today’s customers. They see it as a sign of strength that they are open to outside influences - not a sign of weakness that they want to talk to others.

We know how to engage customers and how to inspire and motivate them to visit a brand. In theory, and often in practice, we can only do this once. If the operation doesn’t deliver, no amount of marketing will encourage a customer to come back. If you really, really understand customers then this bit is the easy (and fun) bit. We look at every element of customer communication to drive covers – including neighbourhood marketing (my favourite) to digital and social media plus advertising.

What’s not tangible in all of this? Just because I am a marketer rather than a designer doesn’t make our input and contribution any less valid or less exciting. I might not have a load of pretty pictures to show you but I do have figures, evidence and testimonials. I was annoyed on Wednesday night and only marginally less so now. I guess that’s a cross that marketers have to bear every day - so our results have to speak for themselves.
Ann Elliott is chief executive of Eliott Marketing and PR

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