Goldman and Cadwalader walk City tightrope on QMH

First Meridien, now QMH; the Cads-Goldman double act is up to something. By Dearbail Jordan

There is such a thing as treading a fine line. If this is the case, then Cadwalader Wickersham & Taft and client Goldman Sachs Whitehall Fund, the investment bank’s private equity real estate arm, must be the City’s tightrope-walking team extraordinaire.

I’m talking about hotel group Queens Moat Houses’ (QMH) debt restructure and expected asset sell-off.

Last month, Goldman Sachs emerged, seemingly out of nowhere, to buy a huge chunk of equity (19 per cent) in QMH, now in its second round of restructuring in just over a decade. It has since come to light that Goldman Sachs has invested in one tranche of debt, the junior-term layer in QMH, and has tried to buy out another, the debenture debt. From this it is easy to surmise that Goldman Sachs wants QMH pretty badly. But its action on QMH has legions of legal and financial advisers scratching their heads. Not least because since sticking its head above the parapet and purchasing the shares nearly a month ago, everything has gone… well… a bit quiet. If Goldman Sachs is trying to psyche people out, it’s doing a good job.

Frankly, no one seems to know exactly what Goldman is up to, although perhaps the past experience of Le Meridien Hotels should serve as a guide. At least until late autumn last year, Lehman Brothers appeared to be the frontrunner to buy the debt-ridden hotel chain. With a huge amount of money at stake – Lehman has invested more than £200m in the business – the bank was determined to buy the company. And then, right at the last minute, who should spring up with a gargantuan offer, but Goldman Sachs Whitehall Fund, advised by Cadwalader.

In the end, Lehman won out, though as reported in The Lawyer (15 March), it was less than happy that Cadwalader, one of its main legal advisers, was acting against it on the deal. But that’s another story.

Anyway, there are parallels between Le Meridien and QMH: the behind-the-scenes investments, the last-minute pounce. We are yet to see if Goldman Sachs will go for the full pounce, but don’t bet against it.

For QMH, the turn-around process has been going on for some time.
It gained notoriety back in 1993, when it nearly collapsed under a crippling £1.3bn debt mountain. This time around, the company has been forced to conduct a strategic review after a number of different factors pushed QMH, still struggling with £628m of debt, to consider its future.

Incidentally, this is a great shame. QMH had been making good progress in sorting through its financial commitments, to the extent that back in 2000, just as it neared paying off millions of senior-term debt, it also decided to bring forward by a year the final repayment of the junior-term to 31 December 2005.

Bad move.

By August 2003, the word was out that a review was in the offing because, according to reports, the company was concerned it could potentially breach bank covenants.

What has happened between then and now is this: QMH, advised by Freshfields, hoped to complete the strategic review within a month. It is still going on. The issue of QMH’s £215m of debenture debt has been resolved. The debenture, put in place in the 1980s, was secured against QMH’s assets – the company has hotels in the UK, Germany and the Netherlands.

Because of the way the debt was structured, the only way QMH could free up its assets to sell off and repay the next layer of debt – ie the junior-term holders – would be to remove the debenture.

Originally, this debt could only be repaid in 2020. Thankfully, the company and the debenture holders, advised by Denton Wilde Sapte, have resolved this, allowing the debt to be repaid at 110 per cent of the loan.

Next is the hoped-for sale of the UK, German and Dutch businesses, which should satisfy junior debt holders, represented by Bingham McCutchen, which is owed £228m. It will not, though, help the convertible debt holders and those with shares in the group, as the company admitted recently, as the expected sale of the hotels will only raise so much.

The auction process has been going on for some time and it seems QMH has gran-ted exclusivity to at least two bidders: Bridgepoint Capital for the Dutch business and Soros Private Equity Partners for the German hotels.

For the UK business, it still seems like it’s a toss-up between France’s Accor and the Pedersen Group UK. And underlying all this is Gold-man Sachs and Cadwalader.

Even before the equity purchase, sources state that Goldman Sachs in March this year attempted to buy out the debenture debt at 112 per cent, which is 2 per cent above the now finalised deal. This was rejected.

However, Goldman Sachs has purchased a chunk of the junior-term debt.

On top of this is its acquisition of a 19 per cent stake in QMH which, since it is acting in concert with another equity holder, Westmont Hospitality Group, gives it a total 29.6 per cent share in QMH, just short of the 29.9 per cent needed to trip a mandatory offer.

The shares are effectively worthless, but it does mean that Goldman Sachs has the power to veto management proposals at, say, an extraordinary general meeting.

With its share of the junior-term debt, Goldman Sachs is ostensibly taking a pincer approach.

While it is unknown just how much of the junior-term debt Goldman Sachs currently holds, the worry is that it may have enough to enforce a blocking vote. If this is the case, Goldman Sachs could throw the whole process, so near to resolution, into doubt.

One can’t help thinking, though, that if the process of restructuring the debt, ie the debenture and seeing through the assets sale, had been speeded up, Goldman Sachs would not have had the opportunity to get its foot in the door at this late stage.

Unfortunately, resolving the issue of repaying the debenture debt did take a huge amount of time. But even now, people are waiting to get started on the asset buyout, determining the structure and process of purchasing the various divisions up for grabs.

Whether the Goldman Sachs pounce is a stroke of genius or utter madness has yet be seen on this transaction. With Le Meridien, it didn’t work out. However, QMH is far from over. You can bet that things are about to get very interesting.