But Adgemis’ renovations were often delayed, leaving multiple pubs closed, depleting revenue. As builders’ invoices were ignored, they refused to finish jobs. One subcontractor waiting on a payment went as far as to hold the paperwork for the gas connection for one venue hostage, forcing the pub to use gas bottles.
Attempting to hire competent executives was also challenging. In at least one case, Adgemis’ company had failed to pay the recruiter, while other staff, fed up with being chased by creditors, left. “It was a cowboy place to be,” one former executive said.
These “as if complete” valuations – mostly done by Egan National Valuers – were viewed as hopelessly rosy by many others in the industry. A negotiation with National Australia Bank called for a fresh valuation of the Public Hospitality Group portfolio, and valuers from one of the country’s largest realtors, CBRE, were approached. But they refused the work, according to three sources familiar with the matter. CBRE and Adgemis declined to comment.
As rates rose, Adgemis took on even more debt to meet repayments, fuel the costs of his company’s expansion and meet other obligations – meaning most of his properties have mortgages and multiple caveats against them.
In some cases, these layers of collateralisation were done unbeknownst to the lenders. David Lyall’s Millbrook, a Melbourne real estate financier, was one of Adgemis’ lenders. He told investors that Adgemis was worth more than $200 million and, in some cases, sold loans to investors worth significantly more than the purchase price of the venues they were backed by.
Millbrook said that, in the case of a hotel in Sydney’s Darlinghurst, he was not told that the same property was security for other loans. “Millbrook did not have knowledge of any additional mortgages and caveats lodged over [boutique Darlinghurst hotel] the Manor House,” the firm said in a statement.
In fact, Millbrook had gone so far as to try to sell the Empire Hotel, another property it had security over via second mortgage. The Empire was eventually pulled from the market, partially because it was decided that the proceeds from the sale would not be enough to cover the debts.
The complicated refinancing – and an anxious wait for investors – at Public Hospitality Group highlights just some of the issues with the rapidly expanding market for private credit, where returns are high and interest is growing.
Even the Australian Securities and Investments Commission warns investors that “there is a low level of legal protection for commercial loans” and court outcomes in their favour are difficult to achieve.
After months, and in some cases, years, where interest payments had halted, holders of Public Hospitality Group’s debts say they feel that their loan managers failed to keep them abreast of the reality of Adgemis’ woes. (And now, under the new deal, they could be facing a haircut.)
“I’m not sure why the company invested in him. We’ve lent money to someone who was already in financial strife,” said one investor. “[The properties] have been valued at such a ridiculous amount, we were never going to get all our money back.”
In some cases, loans to Adgemis have put entire businesses in hot water. Gemi Investments, a major lender to Adgemis, had gated redemptions from its flagship Gemi fund for at least 12 months. “We’re paying interest each month, redemptions have been frozen as a result of your articles [about Adgemis], and we’ve had an enormous amount of redemptions,” one of Gemi’s principals, George Fleming told the Financial Review.
MC Lawyers & Advisers says it is considering legal action against Gemi on behalf of investors over the matter. “We are focusing on representations made by Gemi as to the security over their investments and any claims as to the purported low-risk of those investments,” the law firm said.
When Paul McCombe’s Australian Pacific Mortgage Fund swooped in to take control of two venues in May, other lenders to those same assets had no idea this had occurred until contacted by the Financial Review.
Public Hospitality Group hopes those woes will be behind it. The deal with Deutsche, Gemi, Archibald Capital, and Muzinich & Co leaves Adgemis with far less control. Lenders will be the ones to appoint the new general manager to run the venues.
But nothing is guaranteed. As the $400 million figure won’t cover the extent of Adgemis’ debt, further property sales are expected. It will be up to the market whether they will sell for enough to make up the difference.