Dubai is bracing itself for a hefty £400m loss as Travelodge, the debt-laden hotel group it bought near the top of the market, finalises a bailout that would obliterate its investment in the company.
The New York hedge funds, Avenue Capital and Gold Tree Asset Management, will seize control of Travelodge in a "debt-for-equity" swap that will leave its creditors in control of the business.
The pair have agreed to underwrite a key £60m loan that will tide Travelodge over for a few weeks, while the details of a larger restructuring of the company's debts are hammered out.
Royal Bank of Scotland, Barclays, Investec and Babson Capital, the investment firm, are among Travelodge's biggest lenders and are thought to be considering whether to contribute to the £60m loan.
But whatever their involvement in this loan – and the broader debt restructuring – joint control of Travelodge will be handed to Avenue and Gold Tree, who specialise in these kind of deals and have been creditors since 2006. The restructuring is expected to take about six weeks.
Travelodge is understood to be trading fairly well, with profit before tax increasing by a fifth to about £55m in 2011 on the back of a 16 per cent rise in sales to £370m.
However, Dubai International Capital (DIC), a sovereign wealth fund owned by the Gulf state, bought it near the top of the market in 2006, in a £675m transaction that loaded the group with £478m of debts which it has struggled to repay.
The company operates 470 hotels in Britain, Ireland and Spain employing about 6,000 people. It is only the latest casualty of the mid-noughties debt-financing boom. Peacocks, the budget fashion firm, collapsed last month under the weight of loans from its takeover in 2004.
DIC's loss will only be the latest in a series after Dubai overstretched itself. It got itself into so much trouble that it needed a $10bn (£6.3bn) bailout from neighbouring Abu Dhabi.