Pacific Retail Group’s sale of the Bond and Bond and Noel Leeming retail chains to Australian equity investor, Gresham Partners, cannot be completed until the company complies with a trust deed for its capital note holders.
Pivotal to this compliance is the future of PRG’s struggling British electrical chain, Powerhouse.
Should the trustees be unconvinced that asset-cover ratios outlined in the deed will be preserved, then PRG faces repaying the $63.5 million worth of notes three years early, before the sale can proceed. This would be a last resort as several issues could trigger repayment of the notes.
PRG sold Bond and Bond and Noel Leeming conditionally on July 29 and has been working through the capital note deed requirements, along with other regulatory approvals.
Based on present operating performances, PRG meets the asset ratio without Bond and Bond and Noel Leeming in its stable. As well as Powerhouse, other key assets are underwear manufacturer Bendon, the Living and Giving retail chain and Pacific Retail Finance.
PRG’s acting chief executive, Steve Smith, said from London yesterday he and the board stuck by their earlier forecasts that Powerhouse would break even in the second half of the March financial year but would report a loss for the full-year after a loss-making first half performance.
Powerhouse has drained PRG assets ever since PRG’s 77% shareholder, Eric Watson, arranged to buy it from London receivership administrators, Deloitte & Touche, in September 2003 for $47.2 million.
In PRG’s 2003/2004 full-year results, Powerhouse produced a $46 million loss, before interest, tax and amortisation (EBITA) in the seven months under PRG control, causing PRG to record a net loss of $22.6 million for the full-year to March 31. This compares to an $18.2 million profit the previous year.
The capital notes, listed in 2002 on the NZDX (New Zealand Debt Exchange), are secured over PRG’s assets until their expiry on 15 September 2007. They promise investors a minimum return of 9.25% per annum, payable quarterly until their expiry.
Of the $138.5 million proceeds from the proposed sale of Bond and Bond and Noel Leeming to Gresham, $14 million has been earmarked to repay a loan made in March this year to Powerhouse from PRG’s subsidiary, Pacific Retail Finance. PRG also loaned $20 million to Powerhouse in March and gave guarantees to Powerhouse landlords.
Capital note holders’ trustees, Glenn Clark and Clynton Hardie of Trustees Executors, have been studying the capital note deed’s fine print and the proposed use of the proceeds. They have consulted experts, PRG’s board and Smith during the past two weeks about capital asset ratios.
“I am quite sure we will satisfy the deed and covenants will be met,” says Smith.
In the first stage of their assessment of the sale, the trustees approved the price after satisfying themselves the bids were competitive and at what appeared to be market price. PRG shareholders also approved the sale at a special meeting in Auckland on August 6.
The trustees say they expect to announce at the end of this week whether they approve the planned use of sale proceeds based on compliance requirements in the deed.
“The trust deed contains a provision that while the notes are outstanding PRG will not do anything which might result in any material deterioration in value of any secured property,” says Clark.
According to the deed, the key ratio states that adjusted total assets must not be less than 140% of the aggregate of the actual senior creditor priority amount, plus the dollar amount equal to the note obligations at the relevant test date.
“The actual senior creditor priority amount is $70.4 million and the note obligations are $63.5 million, plus any unpaid accrued interest,” says Clark. “So at all times the assets of the guaranteeing group must be 1.4 times that aggregate amount.”
Clark was reluctant this week to spell out how he and Hardie were ensuring the deed’s terms might be satisfied. It is understood they have been considering issues as broad as the future of the UK housing market and the recent adoption of the UK Competition and Consumers’ Commission recommendations by Britain’s Trade and Industry secretary relating to electrical chains selling extended warranties.
In essence, the latter allow consumers buying electrical goods to shop around for competitive prices for their extended warranties instead of being forced to buy the warranty at the point of sale from the retailer selling the goods.
This is likely to deny Powerhouse millions of pounds of business.
According to a report in London’s Daily Mail last week, confidence in the British housing market has fallen to its lowest point this year because of higher interest rates and fears prices are unsustainable.
Clark says the British subsidiaries in the Powerhouse Group were not part of the noteholders’ security parcel.
But if Powerhouse were to fail, a writedown of PRG’s investment in Powerhouse might lead to a breach of the key ratio, he says.
However a failure of Powerhouse would not by itself trigger a default requiring PRG to repay noteholders.
Noteholders made their investment almost a year before PRG bought Powerhouse.
ANZ Bank has first charge over the notes and the trustees have the second charge.
From MSN New Zealand