Much has been written about the withdrawal of trade credit insurance, but for a graphic illustration of what this really means for a retailer look no further than Thursday’s fund raising statement from DSG International, the parent company of Currys.
It is frightening stuff, particularly the impact it has had on DSGi’s debt levels.
For example. (Emphasis ours)
Group indebtedness as at 7 March 2009 was £502 million with £295 million was drawn on the revolving credit facility.
Management believes this is primarily due to:
- structural changes in the trade supplier credit environment which have limited DSGi’s ability in the 2007/08 Financial Year to repeat historical deferrals of payments of between approximately £130 million — £150 million that previously occurred over its prior financial year end;
- one-off early settlement payments to trade suppliers of approximately £40 million — £80 million to assist them in managing their risk;
- the decision to delay the sale and lease back of the Jönköping distribution centre in Sweden in the short term; and
- interest and hedging costs being approximately £30 million higher than anticipated due to the significant movements in foreign exchange rates.
And
Credit insurers have reduced the cover available in the retail sector, and starting in the second half of 2008 to a significant extent for suppliers of DSGi. If suppliers are unwilling or unable to take credit risk themselves or find alternative credit sources, they may choose to take actions that could have a detrimental impact on DSGi. Management has spent considerable time discussing this issue with a majority of its suppliers and believe they continue to be supportive of the Group
In additon, although as of the date of the prospectus its payment terms with suppliers have not changed, in certain cases, it has made early payments to suppliers outside their terms to deal with issues arising as a result of changes to the credit insurance market. Management believes that its strengthened capital base following completion of the Placing and Rights Issue should reduce the need for any such further payments.The bad news is that DSGi thinks the reduction in credit insurance is a structural rather than temporary change:
The impact of the current economic downturn on financial performance, together with the cost of restructuring the Company, higher finance costs and pressures on working capital due to structural changes to the credit environment, has contributed to an increase in the Group’s indebtedness. The Group has already identified a number of opportunities to mitigate the impact of these developments including the closure of loss-making stores, the reduction of stock levels within the Group and the suspension of dividend payments. However, the continued uncertainty over the economic outlook has made it necessary for the Group to take steps to improve the capital structure of the Group to sustain the business through the current economic cycle.
All of which explains why the company is really having to tap the market for £310m in a deeply-discounted placing and rights issue. Sure, the company needs cash to revamp its stores, but this cash call is all about working capital funding.
Related link:
DSG in $460 mln cash call to fund revamp – Reuters