Mitchell's & Butlers, the largest pub operator in the UK, has seen a liability stemming from a failed property deal more than double since August. Back in July M&B agreed to set up a £4.5 bn sale and leaseback joint venture with R20, an investment vehicle controlled by Iranian property entrepreneur Robert Tchenguiz, in relation to half of M&B's 2,000 pubs. Both sides were to invest £300 mln each, with the joint venture borrowing the remaining £4 bn.

Mitchell's & Butlers, the largest pub operator in the UK, has seen a liability stemming from a failed property deal more than double since August. Back in July M&B agreed to set up a £4.5 bn sale and leaseback joint venture with R20, an investment vehicle controlled by Iranian property entrepreneur Robert Tchenguiz, in relation to half of M&B's 2,000 pubs. Both sides were to invest £300 mln each, with the joint venture borrowing the remaining £4 bn.

M&B took out hedges against interest rates and inflation in the final stages of the joint venture negotiations. The ambitious plan were scuppered in the wake of the credit crunch. The pub group was unable to raise the required loan, which left it with its hedges.

M&B financial director Karim Naffah confirmed during the presentation of the pub group's results this week that the post-tax consequences of the hedging had climbed from £60 mln to £140 mln from August to 13 September. Naffah said the deficit would be booked as an exceptional loss, a move that technically negates the forecast pre-tax profits of £200 mln. He stressed, however, that the impact would not be a cash loss as M&B intends to use the hedge in a future refinancing of its proprty portfolio. Naffah blamed the ballooning deficit on the unusual combination of lower long-term interest rates and higher long-term inflation forecasts due to the turmoil in the debt markets.