Creditors in driving seat

AT A glance, Debenhams, Interserve and Flybe would appear to have little in common.

Debenhams finds itself on the wrong side of retailing history. Interserve is suffering from taking on outsourcing and construction projects at the wrong price. And Flybe fell into difficulty, now resolved, because of overcapacity in the no-frills airline sector.

Each business has faced competing interests in the battle for survival, which has pitted existing managements against activist shareholders.

With 160-stores nationwide, Debenhams is by far the nation’s biggest department store group. It is bigger than House of Fraser, bigger than John Lewis and lacks the unique selling point of upmarket store groups such as Harvey Nichols with very limited portfolios.

Debenhams faces another problem. During a period in private equity ownership in the noughties, there was all manner of financial engineering, including the sale and leaseback of chunks of the store portfolio, locking the group into long leases (some running to 2080) and upwards.

Instead of developing a decent online offer, investment was scaled back, profits temporarily maximised and the group dumped back on the stock market.

More recent history is just as disturbing, with Sports Direct tycoon Mike Ashley acquiring a chunk of the equity, organising a coup against the board, seeking to block a rescue by the existing management and trying to place himself in charge through an extraordinary general meeting which must take place in the next 49 days.

Chief executive Sergio Bucher has an alternative survival plan. He wants to persuade a group of hedge funds to come up with a £150m refinancing package which will give it a chance to get its act together.

This means closing up to 50 stores, keeping the group’s focus on fashion and speeding up investment in online. The other choice is Ashley. He has a track record at Sports Direct and is good at keeping brands alive. But no one has a clue about what he is up to aside from protecting his 29pc holding.

Debs has been through enough financial turmoil to last a lifetime, and one would not normally back a bunch of hedge funds and debt holders against a proven retailer.

But given Ashley’s poor governance record, the lack of transparency and his bullying tactics, the current approach which would see a chunk of the debt turned into equity is preferable.

There is a naive view among some shareholders that in a crisis it is they who have the ultimate say. Wrong: it is the debt and bondholders who are the powerbrokers.

Public interest

IN COMPARISON with Brexit, losing Interserve with 68,000 employees (some 45,000 in the UK) might not appear a major problem.

But for the Government and Whitehall, which has put so many eggs into the outsourcing basket, ignoring Interserve is not an option.

It knows that if outsourcers are allowed to go bust, the costs are enormous.

Picking up the pieces of Carillion projects has been a ghastly experience. Some 80 defects, including structural problems, were discovered at the new Royal Hospital in Liverpool. At the Midland Met Hospital the bill for getting the Carillion-built facility functioning is reckoned to be £320m.

After this experience, the Cabinet Office cannot simply sit on its hands and allow Interserve to flounder.

It will be watching anxiously as the company seeks to wish away £500m of debt through an equity swap with lenders.

The fly in the ointment is US hedge fund Coltrane Asset Management, with around 28pc of the shares. It has presented an alternative plan, which includes a rights issue that it would underwrite.

As much as an equity-based market solution would be desirable, the clock is running down fast and a debt deal or a wellrehearsed administration looks safer.

The lesson from Carillion is public services are too important to be messed with.

Last count

WE COMPLAIN that government is often too slow to act. But in the case of replacing the ill-equipped accounting regulator the Financial Reporting Council (FRC) with a more robust statutory regulator, the normally ponderous Business Secretary Greg Clark has been like greased lightning.

The audit firms, most notably KPMG, ran rings around the FRC with disastrous consequence to the taxpayer and investors.

Not, one trusts, any longer.