January is traditionally a time when the risk of company failure in retail is particularly high. The failures this month of Bank Fashion and West Coast Capital (USC) Ltd are a stark reminder of the difficulties that suppliers face when assessing credit risk.
Bank Fashion Limited was owned by JD Sports Fashion Plc until they were sold to Hilco Capital for £1 in November 2014. Within short order the company was placed into administration on the 5 January 2015.
Bill Dawson, Joint Administrator and Partner in Deloitte’s Restructuring Services practice, said:
“Bank has struggled in a highly competitive segment of the retail industry and has been loss-making for a number of years.”
The latest available accounts for Bank at Companies House are for the year ending February 2013. The notes to the accounts refer to new store openings and substantial access to group banking facilities. The ultimate parent was the strong publically quoted Pentalnd Group Plc, their accounts for the year ending December 2013 show sales of over £1 billion and pre tax profits of over £85,000,000. From a credit assessment point of view leading up to the change of ownership the risk of failure was minimal based on the assumption of parental support.
West Coast Capital (USC) Ltd was a wholly owned subsidiary of Sports Direct International Plc with Mash Holdings as the ultimate parent. Their April 2013 accounts show a pre tax profit of just over £1,000,000 on sales of £77,000,000 against a loss of over £18,000,000 in the previous year. The 2013 account do show negative shareholders funds of £6,800,000.
As a stand-alone credit risk it would have been difficult to justify any meaningful credit limits based on a negative balance sheet. However it is common practice to take into consideration the strength of the parent company and on this basis it would be difficult to say no with a parent showing sales of £2.7 billion and pre tax profits of £239,000,000.
The company was bought out of administration on the same day by another Sports Direct /Mash Holdings company Republic.com Retail Limited.
These 2 failures show just how difficult it is to properly assess credit risk in a very fast changing business environment. They are 2 different scenarios with Bank needing a fresh assessment of the credit risk based on the new owners. But the consequence might well be that credit managers have to take a fresh look at how they assess risk. Underwriters in the credit insurance market might well be looking very carefully at the way that the asses risk on subsidiaries of stronger groups.
In the absence of confidence in the continued support of the parent credit insurance cover might well become a lot harder to come by. Certainly the unsecured creditors are in for a difficult New Year. Based on the latest accounts at Companies House they will be nursing losses of £3,201,000 on Bank and £2,756,000 on West Coast.
There might be the comfort of all monies reservation of title claims to soften the blow. But with so many stores creditors are going to have a tough job identifying their goods and might well have to work off stock lists. Even this small comfort might not be available as it is common practice for large retailers to trade on their own terms of business, which might well say that ownership passes on delivery.
Assuming that both companies do continue to trade outside of administration what about the credit risk going forward? If there are goods on the water or in the suppliers warehouse there might not be much choice on supplying the new company. However credit cover and credit ratings are likely to be in short supply for some time and that leave open the risk of a further loss.
All this comes at a time when a number of retailers are asking suppliers for retrospective discounts and extended terms of payment. There is not a lot that can be done by an uninsured supplier to reduce exposures in the event of a problem if the terms of payment in place are 90 or even 120 days. However whilst a well-structured credit insurance policy will probably not fully cover each and every risk it well help to protect against the consequences of the unexpected failure of a major customer. That peace of mind in the current environment is a price that is very well worth paying for and might well be one of the best decisions that a company will make this year.
A thought on this topic from one of the best-known entrepreneurs in the UK. This is an extract from an interview with Peter Jones on the Chris Evans Breakfast show on BBC Radio 2
Tell us about your worst decision in business. What have you really messed up on? Give us all some hope here…
Well, I was 28 and running a business, doing really well and I had everything and somebody came to me and said ‘do you know what? You should take out credit insurance.’ And I said, ‘Credit Insurance? I don’t have businesses that go out of business, I’m doing alright. I manage my business, it’s all good.’ For £25,000 to £30,000 I could have taken out credit insurance, within 12 months of that decision at 28, I lost everything. I had seven of my largest accounts go bust owing me millions and I lost the business and I ended up literally sleeping in a warehouse for four months. Without a house, without a car, everything finished. So I know what it’s like to build up, have nothing, literally, and then start again at 29. So… Is that sad enough?