So, another leading high street name has collapsed. The administrators have indicated that they will continue to trade the business as they look for buyers.
So, another leading high street name has collapsed. The administrators have indicated that they will continue to trade the business as they look for buyers. Perhaps we should be asking why Comet is just the latest in a line of retail casualties.
Many of the contributing factors are common. Consumers are still feeling the pinch as austerity measures continue to bite, particularly against a generally pessimistic outlook. For those willing – and able – to spend on items beyond day-to-day essentials, there is the ever-developing attraction of buying online.
The significant overhead costs that retail in the physical world faces in maintaining one high street store, let alone a national or regional network, should not be underestimated.
Other more insidious factors loom large. Banks have generally fallen out of love with retailers and remain reluctant to lend despite various Government-sponsored initiatives designed to encourage them to offer funding.
This has a lot to do with the tougher environment banks are facing under the Basel III Capital Accord, which introduces tougher capital requirements and makes it much more costly to lend to higher-risk borrowers.
As retailers are squeezed, they are forced to seek alternative funding sources. PNC, a significant player in the asset-based lending industry, did provide a £30m loan by way of invoice and inventory finance lines to Comet when it was acquired by OpCapita in February.
OpCapita has a focus on retail. Its best known other investment is MFI, another retailer with a chequered history (and previous insolvency). When it acquired Comet for a token £2 and £50m dowry and, with its restructuring changes and the PNC loan, OpCapita vowed to keep Comet trading for at least 18 months. In the event, it has managed just half that. OpCapita’s role, and that of private equity more generally, will be under the microscope.
There is one other significant elephant in the room. A retailer like Comet has multitudinous suppliers. Many, especially the larger and more powerful, will insist on having the benefit of trade insurance to help them guard against the buyer of their goods failing to pay.
Insurers, being insurers, will only provide cover based on their assessment of the buyer’s ability to pay (and the consequential risk of claims being made). The higher the perceived risk, the more expensive the cover.
The leading trade credit insurers, Atradius and Euler Hermes, apparently withdrew cover altogether a year ago as they were unconvinced by OpCapita’s restructuring plans.
There are echoes of Woolworths – the total unavailability of credit insurance caused a vicious cycle of decline and sounded its death knell as suppliers refused to supply without cash upfront or on delivery. Stocks ran down, customers lost interest, cash flows deteriorated and administration became inevitable.
The spectre of cover being withdrawn and questions marks over private equity as an ownership model no doubt haunt other troubled retailers looking over their shoulders at Comet in the run up to a key trading period. For others too, it could be a very black Christmas indeed.
- Brett Israel, Head of Restructuring and Insolvency, Lawrence Graham LLP
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Comment: Why is Comet the latest retail casualty?