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— Analysis —
 On an ordinary morning in early August, dozens of strikingly attired women assembled in front of the headquarters of HSBC Holdings plc in London's Canary Wharf. The women -- all recently married, many wearing formal wedding gowns -- were protesting HSBC's failure to help them in the wake of the bankruptcy filing of online wedding gifts company Wrapit plc. Following the collapse of the London-based retailer, to which the bank is the principal creditor, roughly £5 million ($9 million) worth of gifts, which the brides' guests purchased, will not be delivered. Though Wrapit joins a long list of U.K. retailers forced to file for administration amid a national economic slowdown, the sector is actually doing better than expected.
Says Lee Manning, a partner in reorganization services at Deloitte & Touche LLP,
"The retail sector has been more resilient than people anticipated at
the beginning of the year. There has been a lot of underperformance and
a steady flow of companies going into insolvency, but not a torrent.
Banks have been more concerned about housebuilders."
Deloitte's data reports a fall in the number of retail administrations in the second quarter of 2008, compared with the previous quarter, and a near 30% drop in the first half, compared with the same period in 2007. There were only 107 filings in 2008, compared with 150 in the first six months of last year. A breakdown by subsector reveals an increase in the number of fashion and clothing retailers going into administration. Among the largest and best known were Liverpool's Ethel Austin Ltd. and Mk One Ltd. of London, owned until a few weeks before it became insolvent by the Icelandic group Baugur Group hf. But in these cases, investors have bought assets out of administration, so the scenarios are not as dire as some had expected. In July, Mk One's 100 stores were acquired from administrator Deloitte by a company run by a former director, Mark Brafman. Ethel Austin, which had 300 stores and revenue of £150 million, was acquired in May from administrator Menzies Corporate Restructuring by its former chief executive, Elaine McPherson, for a reported £10 million. As these rescues suggest, distressed investors are moving in to snap up what they hope will be bargains. In July, Boca Raton, Fla., private equity firm Sun Capital Partners Inc. acquired furniture retailer ScS Upholstery plc from administrator KPMG LLP for a reported £20 million. Last year the company had a market capitalization of £85 million. Michael Jervis, a partner in business recovery services at PricewaterhouseCoopers LLP, says he has usually managed to find acquirers for companies in administration. "In most cases, we succeed in selling on distressed retailers as going concerns," he says. "Often they are overwhelmed by the problems faced by a minority of their stores, meaning that a majority are attractive assets." Many creditors have been acting quickly. Says Jervis, "Clearing banks have been managing risk proactively. Their early-warning systems have been working well." Nonetheless, many anticipate a deteriorating economic environment, and the fears are manifesting themselves in a variety of ways. Fabrice Desnos, U.K. chief executive of the influential credit insurer Euler Hermes, part of Allianz SE, in June warned of serious problems in the retail sector in the wake of revelations that his firm had withdrawn cover from companies supplying the struggling furniture chain Land of Leather Holdings plc. "Companies that are highly leveraged have a particular weakness in their business model," Desnos says. Leverage, of course, was the mother's milk of private equity before the credit crunch. Not surprisingly, several private equity-backed companies have already filed for administration, notably Floors-2-Go plc, which was owned by Alchemy Partners LLP. Though the debt default rate in the retail sector has been negligible, that could change if consumer spending plunges in the critical holiday season. Says Stefaan Vansteenkiste, a managing director at turnaround advisers Alvarez & Marsal Holdings LLC in London: "We expect more trouble ahead." |
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