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Closing The Funding Gap
Posted by: JFoster    Tags:     Category:    

Retail restructuring specialist GA Europe and IFT Fellow Pelham Allen have developed an innovative short term stock financing solution, adding to GA Europe’s existing funding capability. Jane Hughes, GA Europe Investment Director outlines how GA Europe can help retailers to plug the funding gap.

The funding challenge facing UK businesses may be a well-covered debate, but the situation shows little sign of any real improvement. According to Bank of England figures, total business lending fell 4.4% to £4.8bn in the three months to February with lending now having fallen in 21 of the last 23 months. Whilst demand side factors are part of the problem, particularly from small businesses looking to batten down the hatches and pay down existing debts, supply-side initiatives have done little to alter the status quo. The Funding for Lending Scheme, for example, seems to have failed to gain any apparent traction. Far from it, some banks have been actively managing down their exposures in certain situations. Admittedly these have tended to be stressed cases, but nevertheless it’s difficult to believe that Stephen Hester’s recent assertion of RBS being desperate to lend £20bn of spare cash, is entirely representative of the bank funding climate.

The net result is that many businesses are hamstrung, at best unable to drive forward recovery, at worst at risk of descending into zombie status or even further. In terms of this funding challenge, the retail sector is arguably more exposed than others. Not only has continued poor trading piled on the pressure - the sector has borne the brunt of the consumer’s malaise with both consumer confidence indices and sector like-for-likes bumping along the bottom of the trough, way off their 2007 peak. Retail also has more than its fair share of highly leveraged private equity backed businesses, many of which face a refinancing hump in 2014. And with additional pressures at different parts of the trading cycle ie peak funding usually being required following the Easter trading period until the autumn/winter cash starts flowing in October or November, it’s no surprise that funding challenges are often near the top of many retailers’ agendas.

Against this backdrop, innovative solutions are undoubtedly needed to bridge the retail sector’s funding gap. Asset-based lending continues to increase in popularity – according to figures from ABFA, finance secured specifically against stock (as opposed to other asset classes) was 20% higher across all sectors at the end of 2012 than in 2011. The retail sector currently accounts for only a tiny fraction of this and whilst recognising the inherent challenges of ABL in retail such as retention of title issues relating to stock, we believe that the market will grow significantly. It certainly represents a market which GA Europe is looking to tap into, backed by our US sister company GA Capital.

Whilst in the main, asset-based lending facilities are typically £10+m, we also think there is a market for smaller niche asset-backed funding solutions, which are able to sit alongside existing debt structures. In conjunction with IFT Fellow Pelham Allen, GA Europe has developed such a financing solution – a short term top-up financing facility, secured against stock but which doesn’t cut across existing debt funding or security. Put simply, a special purpose vehicle is set up to acquire stock which is sold on to the trading company on a consignment basis. The SPV services the loan and meets the associated costs.

Commenting on the funding facility, Pelham Allen said, “This solution has the potential to enable a retailer to acquire new season stock when extended supplier terms are not available, existing facilities are inadequate and renegotiation of facilities with existing lenders is either impossible or unattractive. As such, it can keep a retailer in business and still under the control of its shareholders, despite seasonal funding pressure.”

Whilst we see this type of short term stock financing capable of plugging one of the funding gaps in retail, it represents just one example of GA Europe’s broader funding capability. Primarily an investor in distressed retail, we previously supported the MBO of footwear retailer Shoon out of administration in May last year by providing funding for working capital as well as taking an equity stake.

Separately, we have been involved in numerous insolvent retail situations, working alongside the Adminstrator to trade the business and potentially funding the purchase of new stock. One such situation was Game, which went into administration in March last year. As Joint Administrator Mike Jervis of PwC commented following the successful sale of the business to Opcapita, “GA Europe’s commitment to buy new stock would have been a vital factor in keeping the business going and in a saleable state, had there been a requirement to trade in administration for any longer.”

With further restructuring of UK retail expected to be at more modest levels than in 2012 and the early part of this year, we’re expecting an increasing proportion of GA Europe’s capital to be put to use helping retailers meet their funding needs on a relatively short term basis, where an innovative and flexible facility is required. Parts of Europe, on the other hand, represent an entirely different proposition. For example, having recently expanded into Italy, it’s clear that a much more fundamental workout approach will be the order of the day.

Restructuring retail for tomorrow’s growth
Posted by: Jon    Tags:     Category: News   

UK retail is in the midst of an extended period of restructuring but administration is by no means the end of the road


Restructuring retail for tomorrow’s growth


The UK consumer economy has been bumping along the bottom of the trough for some time, with little near-term prospect of sustained improvement. British Retail Consortium figures show that we’ve seen negative like-for-like sales across the retail sector as a whole in 11 of the last 18 months, with an even bleaker margin picture driven by the vicious cycle of constant discounting. Alongside the weak macro-economic climate, the retail sector is also undergoing significant structural change, as the shift to omni-channel retailing reduces the need for physical space. And in an already difficult financing climate, some lenders are taking an increasingly tough stance to the retail sector – as seen in the banks’ apparent unwillingness to extend facilities in recent high-profile distressed situations such as Peacocks, Game and Clintons. The net result is an extended period of UK retail restructuring, characterised by high levels of distressed deal activity and extensive space reduction.

Space cull
The sector is probably two years into a five-year period of rebalancing which will result in a 15-20 per cent decline in non-food physical space. Structurally challenged sectors including entertainment, where the internet has completely changed the rules, may well see even bigger reductions - we are almost down to “last man standing” in sub-sectors such as music, electricals and books. The subdued housing market will continue to take its toll on weaker players in related sectors, particularly furniture/ home furnishings. But the largest withdrawal of space is likely to come from the highly competitive clothing sector, characterised by a very long tail of small and mid-sized retailers and aggressive online migration. While much of this restructuring will come from healthy retailers right-sizing their portfolios, we will continue to see a number of failing retailers (often those with unsustainable debt levels) encountering high levels of distress and requiring some form of formal insolvency process. It’s not surprising that ONS figures show retail administrations and CVA s up 35 per cent in the first half of 2012, on the back of a 9 per cent increase throughout 2011. Crucially though, most retailers that have been through administration have emerged as slimmer businesses with optimised store portfolios and more appropriate funding structures and cost bases.

Shoon restructuring
This certainly tallies with the experience of retail restructuring firm GA Europe, which has been active in the UK market since 2010. In May, GA Europe supported a management buyout of footwear retailer Shoon, from administration. Shoon’s passage through administration was not the white flag waving exercise, often associated with insolvency. “We went into administration with a clear plan to work closely with all our key stakeholders in order to give the continuing business the best possible chance, post administration,” explains Shoon’s managing director Stephen Sanders. “While we found the administration process a blunt instrument, it did serve to keep the business alive, protect the profitable core, maintain jobs and give us time to attract new investment.” That investment, from GA Europe, provided funding for working capital. The firm also took a minority equity stake. This met the management team’s requirement for a supportive investor prepared to roll up its sleeves, and played to GA ’s core retail operational expertise. “Strategically and operationally, GA is bringing a new level of commercial rigour to the business,” enthuses Sanders. “Their role extends way beyond that of a lender.”

“Strategically and operationally, GA is bringing a new level of commercial rigour to the business,”

Also on the agenda is leveraging the existing base to develop extra revenue streams through new channels including web partners and concessions. Sanders is also confident that the business is scalable once again, having been slimmed down to 11 stores from 23.

Time critical
The administration process bought Shoon’s management sufficient time and space to find the right restructuring solution – it traded in administration for three months. By their nature though, most insolvency situations are highly complex and incredibly time critical. For example, the 56-strong value department store chain TJ Hughes suffered against the tough trading climate, and in July 2011 reached the point where administration was the only option. Despite a complex situation with multiple debt holders, GA Europe acquired the £10.2m second-lien debt in TJ Hughes within a matter of days. Immediately post transaction, the restructuring specialist was able to deploy its operational expertise, taking full control of all TJ Hughes stores, while supporting administrator Ernst & Young in some key commercial aspects of the administration. A swift pricing review and targeted programme of markdowns, backed by a comprehensive advertising campaign and aggressive stock augmentation, increased like-for-like sales by 60 per cent. Ultimately this improvement in trading performance enabled Ernst & Young to fully explore all options for the business, resulting in the brand and six stores being sold as a going concern to Benross Group.

Zombies beware
Looking ahead, GA Europe chief executive Gavin George expects UK restructuring activity to remain high in the medium term. “Consumer confidence will remain fragile for the foreseeable future,” he says. “The space shake-out still has two to three years to run, and the lack of liquidity in traditional lending channels looks set to continue.” There is also likely to be a further mini-wave of restructuring when interest rates eventually start to rise. “Although we are unlikely to see rising interest rates before consumer sentiment improves, highly geared zombie retailers will then struggle to service their debts, while banks will be better placed to crystallise their losses, says George. “At this point we would expect further bank-led insolvencies.” However, he does predict healthier days further ahead once the sector has fundamentally rebalanced. And if there was some short advice for George to offer stressed and distressed retailers? “Actively manage all your key stakeholders, get a clear view of key working capital pinch points such as quarter dates and supplier payments, trade for cash rather than margin, and make sure you have options – look at other financing routes and engage early with potential investors or restructuring specialists.”

Gavin George
0207 318 0577

Download the PDF here.

Restructuring for tomorrow’s growth
Posted by: JFoster    Tags:     Category:    

The imminent rental quarter day on March 25th will no doubt be the trigger for more retail casualties, after 2012’s high profile Q1 administrations of Peacocks, Bonmarche, Blacks and most recently Fenn Wright and Manson,amongst others.

We estimate that this ongoing process of insolvencies will contribute to a reduction in non-food retail capacity of some 15% over the next 3 - 5 years – being disproportionately higher in sectors facing structural decline such as entertainment or electricals, and certain discretionary segments such as clothing.In short, we’re facing a once in a generation clean-up of UK retail as the sector adapts to the structural threat to physical space from the internet, grocers expanding aggressively in non-food, consumer confidence bumping along the bottom of the trough, and deepening cost pressures from higher sourcing costs, energy prices and business rates.

What we mustn’t lose sight of though is that by definition restructurings result in smaller businesses with recapitalised financial structures capable of reviving the business as it goes forward. This has certainly been our experience of situations where GA Europe has been the principal restructuring protagonist, such as Speciality Retail Group, British Bookshops & Stationers and TJ Hughes.

And it’s not all bad news: recent figures from FRP Advisory suggested that almost 70% of the 39,000 staff at the larger retailers falling into administration in 2011 retained their jobs after the companies emerged from administration. And even where significant numbers of shops are scheduled to close, as at Peacocks, sensible renegotiations with landlords can restore the viability of some outlets within a restructured and refinanced core business.

Over the next couple of years, there will be more restructuring of businesses with a decent underlying proposition and a realistic pitch to customers – but carrying the legacy of overlarge store portfolios and unsustainable levels of debt. These are exactly the types of business in which restructuring specialists like GA Europe are looking to invest. The changes needed are not just financial: putting a retail business back on a sound footing almost always requires hands-on expertise to carry out the hard operational restructuring, as well as an injection of new capital.

Retail rebalancing act
Posted by: JFoster    Tags:     Category: Market trends   

Media hype about carnage on the high street may be overplayed, but at GA Europe we do believe that the UK retail sector is near the start of an extended period of fundamental rebalancing.  We think that we’ll see the withdrawal of approximately 10% - 12% of non-food capacity over the next three to five years – a mix of healthy retailer store portfolio rationalisation and distressed retail shake-out. So far this year, we estimate some 3.5% of UK non-food retail capacity has been withdrawn from the market although the DIY sector accounts for over 50% of this figure with the demise of Focus DIY.  

Whilst the pace and shape of restructuring will vary considerably by sector, it’s pretty clear that the most exposed segments of the market are:  other housing related sectors, discretionary purchases, particularly the fragmented clothing space (value and middle-market), and what we call ‘structural’ ie those sectors where the internet has permanently changed the rules of engagement, such as entertainment and electricals.  The sustained weak macro-economic climate, coupled with ongoing changes in the way consumers shop, demands  this  ‘once in a generation’ clean-up, followed by an uncompromising focus on turnaround and repositioning.  Although the next few years will be a white-knuckle ride for many retailers, those left standing should be well placed to capitalise on tomorrow’s growth.    

View from the coal face
Posted by: JFoster    Tags: ,     Category:    

As part of GA Europe’s retail delivery capability, we have a network of field consultants, who we’re able to catapult into stores at short notice following the completion of a transaction.  Lenny Ruback, for instance, has 39 years of retail experience – all in store operations and largely in menswear, including 18 years at Moss Bros.  In other words, he was perfectly suited to oversee a number of stores on one of our deals, Speciality Retail Group.

Questioned about a typical day on the SRG transaction, it’s clear that there’s no such thing for Lenny.  “No two days are the same - I get round all seven stores two or three times per week and I might even be on the road, moving stock between stores”, he explains.  It goes without saying that maximising time on the shopfloor is crucial, in order to ensure that merchandising standards are high and consistent, and that point of sale materials are fresh and interesting.  Ensuring that all the stock in each store is selling at the right price is also no small feat, particularly as price changes and markdowns are a constant feature of managing distressed retail situations. 

However, Lenny’s in absolutely no doubt that the people side of the business takes centre stage. “Being involved in tough retail situations often means dealing with emotionally charged store staff - and that’s where experience is so vital.” And the importance of good communication skills cannot be overstated - whether it’s holding store conference calls across his seven stores every other day, dealing with individual staff issues, acting as the gatekeeper for store instructions from the centre, or implementing staff incentive schemes and creating a healthy rivalry between stores.  As Lenny concludes, “Empathy, the ability to motivate a team and the need to be a first-class communicator are right at the top of my ‘must-have’ list.”  


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