Wow, what happened to Principles and how on earth did it all happen so fast?
Wow, what happened to Principles and how on earth did it all happen so fast?Principles' 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 has 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. This 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 of 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 was partly owned by Baugur (the parent of the parent company, if you like). Baugur is an Icelandic investment group which snapped up stakes in brands on the UK high street on a 10-year shopping spree. Its 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 bankruptcy 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!
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 old saying goes, “Follow the money !”