A source close to Orchid Group, the 300-strong managed pub operator backed by GI Partners, has stressed that it continues to receive firm support from its banks despite news that it is set to breach covenants on its £42.4m of debt. Orchid reported a pre-tax loss of £17.24m for the 52 weeks to 1 January 2011. The company, which went through a pre-pack administration at the end of 2008, forecast that it was to breach some of its existing covenants at the end of last month and “thereafter due to current trading patterns”. The group said discussions were ongoing with its lenders as to possible solutions. It said that assuming these discussions were successful it “will be possible to establish new loan covenants”. It said that it considered the existing facilities “not appropriate to the group’s long-term needs”. The directors of Orchid also said they had a “reasonable expectation that sufficient and appropriate loan facilities suitable to the company’s and the group’s needs will continue to be available for the foreseeable future and that appropriate revised covenants will be set as part of the process”. It is understood that Lloyds, Orchid’s main lender, is in advanced talks with other lenders including Deutsche Bank about the possibility of selling its loans at a discount, which could ultimately result in a debt-for-equity swap and Deutsche taking control of the company from GI Partners. However, an Orchid source played down the significance of the expected covenants breach. “It’s a bit of a technicality really. The company has a strong working relationship with its banks, who continue to be very supportive of its strategy to acquire more sites, and everyone is focused on the continued growth of the company.” The source also pointed out that Orchid’s debt, at around £42.4m, is not large in comparison to its annual ebitda – £35m to £40m. Meanwhile, Orchid continues to look at growth opportunities. Last week it revealed plans to increase the size of its Pizza Kitchen & Bar estate from 14 to 25 during the next year. For the year to 1 January 2011, Orchid said pre-tax losses had widened from £1.83m in 2009 to £17.24m. It made an operating loss of £13.03m in 2010 compared to a profit of £2.35m in the previous 12 months. Turnover dropped from £182m in 2009 to £173m last year. At the end of 2008, the company, which is led by Rufus Hall, undertook a pre-packaged administration, dumping onerous leases and striking new financial agreements with its banks – HBOS and Deutsche Bank. The process saw it leave 48 leasehold bars and pubs with the administrator and immediately saw a new company, led by Orchid’s management, buy back at least 240. The company was formed two years ago when it bought 290 former Spirit pubs from Punch Taverns for £571m. At the time, the company said it hoped the restructuring would put it in a strong position to lead any sector consolidation. Since undergoing the pre-pack, the company has taken back 10 sites from the collapsed operator of Bar Room Bar and acquired the 43-strong Premium Bars & Restaurants business out of administration. It owns brands including The Living Room, Ultimate Leisure and Bar Room Bar as well as a collection of individual pubs, restaurants, bars and clubs. Earlier this month Orchid said like-for-like sales at its 16 Premium Bars & Restaurants outlets revamped since 2009 at a cost of £3m are 20% higher than in the rest of the estate.