Follow the money

Principle’s demise is one of the instances of severely troubled retailers using the new pre-pack administration. This is quite a controversial insolvency process that had new rules instigated at the start of this year (did they have a crystal ball?)

The pre-pack process, frequently involves the swift sale of a business back to its original owners, but free of unsecured debt. It has prompted concern that suppliers have been left in the lurch, and as a supplier to businesses myself, you’ve got to wonder, who’s paying the suppliers?

Sure Debenhams have bought the stock, but if the suppliers don’t get paid, there’s a knock on effect down the food chain, which could mean many suppliers businesses going under, which is hardly fair, as the thing with these agreements is that they happen behind closed doors and there is no advance warning to unsecured creditors. The suppliers are blindly trading right up to the point of administration with these companies.

If there was more transparency, the client could make a choice over how much they supply to the company. Pre-packs have been used recently by retailers including the tea and coffee specialist Whittard of Chelsea, Officers Club and Envy to name a few.

So what actually happened? Basically Mosaic (the parent company) owned Principles, Shoe Studio, Oasis, Warehouse and Karen Millen among others. With debts of up to £450 million. Yes, that’s million pounds Sterling, they couldn’t keep refinancing their loans in the current economic climate. They entered the pre-pack agreement in order to shed some unprofitable sites, and if we’re honest, a lot of debt, so their debt total would be more manageable and make them more attractive to investors.

Now Mosaic were partly owned by Baugur,(the parent of the parent company if you like) Baugur are an Icelandic investment group who snapped up stakes in brands on the UK high street on a ten year shopping spree, their investments included House of Fraser, Hamleys, Iceland and of course Mosaic. The Baugur group hit the buffers in the wake of the Icelandic banking collapse in October and after building up debt as it expanded.

Baugur has now filed for bankruptcy after Icelandic courts refused to grant its application to extend its protection from creditors(Hmmm rather an interesting concept really). Baugur had to file for bankrupcy after its UK arm was forced into administration by Landsbanki, although they still have stakes in All Saints, Jane Norman and Whistles. Management at some of these retailers are now looking to make deals exploring debt-for-equity swaps or management buyouts.

So the knock on effect down the chain is clearly visible. What hasn’t been transparent up until now is the sometimes perilous life cycle of retailers. I remember years ago the MD of a very cool chain of 27 shops telling me that his stores didn’t make a profit for 10 months of the year. At the time I was shocked, as independent retailers just don’t have that luxury! Try having that conversation with your bank manager as the owner of an independent business – it will be short !

As small businesses we may be standing in awe looking at the huge figures that these businesses are talking about, but the principles are the same, whatever the size of business, don’t borrow more than you can afford to pay back…!

So, what’s the moral here? Well, the most obvious one is that borrowing in a vibrant economy is ok, but in a contracting economy, spare money is scarcer than hen’s teeth, and if you’re going to borrow an insane amount of money, you’d better check out not only your lender, but your lender’s lender and so on up the food chain.

As the saying goes “Follow the money ! ”