A debt-heavy deal during the credit bubble, a recalcitrant hedge fund, a plunge in demand for hotel rooms outside London: All conspired to push the owner of the owner of a U.K. portfolio of Marriott hotels into bankruptcy late Tuesday, June 14. The filing leaves Royal Bank of Scotland Group plc £700 million ($1.14 billion) out of pocket.

The Edinburgh bank, the majority senior lender of the chain of 42 hotels, enlisted Ernst & Young LLP's Alan Bloom and Roy Bailey to serve as joint receivers for the hotels' British Virgin Islands-based holding company, Professional Ventures Corp., after failed attempts to agree on a debt-for-equity restructuring.

Royal Bank had sold the hotels in March 2007 for £1.12 billion to a consortium including Israeli property tycoon Igal Ahouvi, Quinlan Private Capital Ltd. and Israel's Delek Real Estate and also provided most of the debt financing.

Since then Ebitda at the business has fallen from around £90 million to roughly £55 million in 2010, according to a source with knowledge of the assets. About 37 of Marriott's 42 properties are outside London, where the Marriott brand has not lured sufficient business during the recession.

"Regional England is a different creature altogether," the source said. "A lot of these were set up to attract conference business or as weekend retreats, and in the recession they got whacked."

A handful of the properties, including an establishment in Marble Arch, London, are held under a lease rather than owned freehold.

Ernst & Young stresses that it's "business as usual" for the four- and five-star properties, which are operated by Marriott International Inc. of Washington under a 30-year contract signed in 2006.

It is not clear when and how the chain will be sold, though various parties expressed interest or made bids for the assets just before Royal Bank decided to call in the receivers on Tuesday. Ernst & Young has installed a new board at the hotels, led by Steve Bodger, a portfolio company consultant at Alchemy Partners LLP.

About £900 million of debt lies behind the portfolio and some observers put a valuation of roughly £800 million on the assets.

In 2007 the £1.12 billion buyout from Royal Bank of Scotland was financed by around £860 million of senior debt, with a further £60 million for working capital. (Five of the hotels were subsequently sold for £50 million to pay down debt.)

The level of leverage was standard for deals in the sector at the time, but Royal Bank's continued presence as the hotels' main lender proved an insupportable burden. "Had they put in more conservative financing, clearly the thing would still be worth a lot less now, but it wouldn't have had so far to fall and its capital structure would have been better able to absorb the weaker performance," the person said.

Another source said: "The terms reflected the terms being done at that time. It was just unfortunate that the deal was done at the top of the market."

The receivership also highlights the power of buyers of distressed debt to influence the fate of those assets.

Hedge fund York Capital Management LLC, which bought mezzanine debt held by Lehman Brothers Holdings Inc. around the fall of 2008, has opposed the debt-for-equity restructuring Royal Bank has been pushing for, according to two people familiar with the situation. One person said Ahouvi had been willing to inject more equity under the plan.

RBS confirmed it had appointed receivers to the holding company but declined to comment further. An E&Y spokesman also declined to comment beyond a short statement. York Capital wasn't immediately available for comment.