Within the social calendar of the salubrious coastal community of Dalkey in south county Dublin, the annual lobster festival is one of the busiest.

More than 6,000 kilograms of lobster are consumed over the course of a crustacean feast which packs the pubs and restaurants of the south county Dublin village.

However, as he chatted to the businessman Bobby Kerr’s national radio show in August 8, Padraic Hanley sounded quite subdued.

A veteran restaurateur, Hanley owns a fish and steak restaurant in Dalkey called Ouzos, as well as the Fish Shack Cafe, located in nearby Sandycove, a village where Kerr is a habitué.

“It is a big weekend. The week before it starts to build up and then the week after too. It is a big weekend. Everybody mucks in,” Hanley told Kerr, a former chief executive of the Insomnia coffee chain.

“Where do you see the future of restaurants as someone who has been in the business a long time Padraic?” Kerr asked. “Ouzos middle market trading there for years…”

“We are in our 11th year in Dalkey. I think the pressure is going to be on the midmarket,” Hanley replied. “I think eating out has become much more of a… going out and having a starter and a main course is not something people do. If you go out on a Monday you only have a main course. It is more functional than it was.”

Within ten days of his radio interview Hanley was in the High Court in a last ditch effort to save his wider restaurant group, PBR Restaurants, from collapse.

With liabilities outweighing assets, Hanley was forced to seek bankruptcy protection from his creditors and the appointment of a court appointed examiner.

Late on a Wednesday afternoon Mr Justice Senan Allen said he was satisfied to appoint Neil Hughes of Baker Tilly Accountants as interim examiner.

Justice Allen concluding that PBR had a reasonable chance of survival provided its business was restructured based on his reading of an independent expert report prepared by accountant Cormac Mohan of Fitzwilliam Corporate Insolvency. PBR had taken a knock but it was still all to play for. The examiner was given 100 days to save the business.

Oozing with quality

PBR Restaurants began in November 2008 when it opened its first location called Ouzos in Dalkey. The mid-market steak and seafood restaurant can hold 65 people and is best known for its lobster. About €150,000 was spent creating the restaurant on top of €40,000 paid for its leasehold. Economically it was a tough time to launch.

The Irish Times described the restaurant as “oozing with quality” when the paper reviewed it about four months after it opened. The restaurant was popular locally and hosted a successful charity dinner in 2009 with the likes of solicitor Gerald Kean in the kitchen and celebrities like hurler DJ Carey and former Miss World Rossanna Davison serving up meals.

PBR was a joint venture between three business partners: veteran restaurant owner Padraic Hanley, accountant William Quane and chef Raouf Djeffal.

Despite the economic crash PBR felt confident enough in November 2010 to open an  Ouzos in nearby Blackrock, another prosperous outpost. At the time Blackrock village had been hit by the crash, but there was still a demand for a mid-market restaurant in what was still a wealthy suburb.

Five years later on March 2015 PBR opened its first Fish Shack branded restaurant. This was a brave decision, that quickly proved lucrative.

PBR approached the Dun Laoghaire Harbour Board with the idea of opening a high quality fish and chips mobile outlet on its popular East Pier. At the time the pier only had ice-cream parlours on it which were busy during the summer and quiet in winter, so having a decent fish and chip shop made business sense.

About €60,000 was invested to get this project going, and it proved a cash cow. Rapidly PBR paid off AIB, after the bank advanced money to get it off the ground.

In March 2017 PBR opened a second Fish Shack on Parliament Street in Dublin 2 before it opened a third unit in Malahide in north Dublin.

Four months later PBR opened a Fish Shack Cafe in Sandycove. This restaurant could hold 58 people and required an investment of €170,000 funded by both the company and AIB.

In a later radio interview, Hanely said the idea of Fish Shack was to “strip back the service, no backs on the chairs, no bookings,” in order to allow it serve top quality fish. “If lobster is around we will often do half a lobster with salad and chips for twenty quid. It works. People like it,” he added.

Fish Shack developed its own craft beer range, which was both a point of difference and source of additional margin.

In March 2017 PBR opened a second Fish Shack on Parliament Street in Dublin 2 before it opened a third unit in Malahide in north Dublin.

Between them almost €400,000 was invested in order to allow the group serve up to 140 customers. This type of expenditure was typical for the industry, and required to win staff.

PBR was now a business of significant scale. On average it employed 80 people a week on a full and part-time basis.

To secure its supply of fish, Hanley personally leased a unit in Kilkeel, Co Down. This helped the group guarantee the quality of its fish which were processed there prior to distribution to individual restaurants.

PBR was ordering up to 2,500 kilograms of haddock fillets per month so it made sense to go into processing in 2016 when it entered into an agreement with a company called Knockbarragh Seafood. PBR paid just one person to oversee the process which was undertaken by local filleters on a per box of fish basis.

It was a prudent way of securing the thing that most made Fish Shack stand out: good quality stock.

On the expansion trail

Between 2013 and 2018 PBR saw its revenues grow strongly annually starting at €1.8 million and rising to €4.3 million. Despite turnover rising by 140 per cent the problem was that the company recorded a loss every year. One reason for this was that the company had a large amount of fixed assets which had to be depreciated annually because of wear and tear.

In general however PBR was running at a small loss annually. This was manageable, but its real problem came about because of its Blackrock operation. In PBR’s financial year to the end of December 2018 it had a net loss of €282,000 related to this one restaurant causing the entire group to record a loss of €236,000.

Mohan however noted that one factor that had dragged on the company was the high level of interest repayments it was making after borrowing from alternative lenders Grid Finance and Linked Finance.

PBR’s Fish Shack operations on a standalone basis were performing strongly pulling in a net profit of €233,000 for the same period. In his independent accountants’ report Mohan said a “more appropriate” way of determining whether the business could survive was to look at its free-cash flow. He noted it had recorded a positive earnings before interest tax depreciation and amortisation every year with the exception of 2016.

The rent roll for PBR’s six operations stood at €319,500. This was not that bad, it was somewhat below an industry average of rent equating to 10 per cent of turnover.

Mohan however noted that one factor that had dragged on the company was the high level of interest repayments it was making after borrowing from alternative lenders Grid Finance and Linked Finance.

Ultimately however Mohan concluded PBR’s problems lay in where its business began.

“The company’s Blackrock and Dalkey units are loss making with the unit in Blackrock being particularly problematic,” he concluded.

To tackle this PBR had closed Ouzos in Blackrock, which it turned into a gastropub called Kelly and Coopers.

This gastropub opened in January 2018 but it required investment which takes time to payback. Blackrock is an intensively competitive location for both bars in restaurants.

The addition of drinks giant Weatherspoon which is located in the Three Tun Tavern in Blackrock makes things even tougher in the village. Other pubs longer around have more established clientele.

In Dalkey, meanwhile, Ouzos has had to compete with new restaurants opening as the economy recovered. Brother and sister Kim and David O’Driscoll opened up DeVille’s not far from Ouzos. It too targets the midmarket with quality food.

Investing in new outlets and repaying debts associated with old ones put pressure on cash flow. It turned to alternative lenders Grid Finance and Linked Finance for short-term facilities. “Given the nature of these facilities the interest rate on these loans are above those that the company would be expected to pay if it obtained the same funding from a pillar institution,” Mohan concluded.

Grid Finance operates the credit card terminals of PBR deducting 9 per cent of all credit card sales as part of its repayment schedule.

This impacted cash-flow to the extent that PBR had to wait for Grid Finance to transfer back the balance owed to the company after deducting its 9 per cent, according to the expert report.

Mohan said he believed it was for an examiner to the company to conduct a “detailed review of the allegations made in relation to the directors’ loan accounts.”

On top of this the independent expert report noted there was a rift at board level. Mohan said he had had to rely only on talking to Hanley when preparing his report, so he admits he does not have the entire story.

Mohan said the issue at board level was he understood that the company’s directors disagreed about how best to rectify its cash flow issues. The treatment of expenses of directors and their set-off against directors’ loan accounts was another issue in dispute.

“In my view, I do not believe it formed part of my scope as independent expert to determine the merits of the dispute between the board,” Mohan said.

“I believe that there is an irretrievable breakdown in the relationship between the directors and this breakdown is a threat to the continued survival of the company,” he added.

Mohan said he believed it was for an examiner to the company to conduct a “detailed review of the allegations made in relation to the directors’ loan accounts.”

The final issue facing PBR was its debts to the Revenue Commissioners which at one stage reached €188,000.

A deal had been agreed in March 2019 to payoff the Revenue to the tune of €18,000 a month and PBR had successfully made five repayments reducing the amount owed to €94,000.

In addition the report noted PBR also had current unpaid taxes owed to the Revenue which would also have to be dealt with. PBR saw examinership as its route to righting itself.

Breathing space

Mohan concluded that despite its challenges PBR could survive provided it got a “breathing space from its creditors,” to allow it work out what to do. The company was insolvent. However he said: “Having reviewed the financial history of the company it is apparent that the underlying business of the company is profitable, with the exception of the loss-making Blackrock unit.” Earnings he said were positive for six of the seven years reviewed.

An examiner is expected to carry out a strategic review of each unit in the business to determine their viability. There are undoubtedly many good things about the business.

Over the 12 months to August 2020, PBR  has prepared projections that show it can trade at a cash surplus. The management of PBR has already held discussions with potential new investors. Mohan said a rescue plan for the business “may include the closure of loss-making units subject to a strategic review of the units” and onerous leases may have to be repudiated.

A “streamlined management team” to execute this business strategy may also be required. Winding up the company would lead to a deficit of €1.39 million while the statement of affairs for the company on a going concern basis shows a more modest deficit of €407,000.

A scheme of arrangement is being worked on by the businesses examiner. This could include a partial write down of existing creditors; the securing of new investment; the generation of a cash surplus during the court protection period. In total unsecured creditors are owed €419,000 with connected creditors made up of members of the Quane and Hanley families owed €346,000.

Hughes is working on a rescue plan and he is due to update the High Court later this week. There has been at least three expressions of interests in some or all of the business. Hanley is unsurprisingly among the potential bidders. The Fish Shack in particular has a good brand and a quality product, that can be scaled. PBR has found itself on the hook for various reasons, but overall it is reasonably well positioned to slip free and keep trading successfully.