At the table
Charles Bodie, Kelso Place
Bodie is a partner at Kelso Place. He joined the firm in 2005 from Singer & Friedlander, where he specialised in structured finance and worked on numerous corporate workouts.
Paul Cartwright, Rutland Partners
Catwright became managing director of Rutland Partners in 2005, having joined the firm in 1988. He qualified as a chartered accountant with arthur Anderson.
Steve Keating, Privet Capital
Keating founded turnaround house Privet Capital in 2007, having previously spent ten years in the workout and restructuring team at 3i.
Jamie Constable, RCapital
Constable is the chief executive and founder of RCapital and is actively involved in the firm's investments. Previously he founded accountancy firm Robert James Partnership.
Last month we saw the acquisition of Comet by OpCapita for £2. What does the financing structure of deals like that really look like?
Keating: It was a dowry deal. To me it was very similar to Habitat, where the current owner doesn't want to be the one that puts it down but has to offload it somehow. However, the complexity over the pension scheme, as well as some quite significant losses, makes it a bit of a falling knife.
Is it possible to get debt into a deal of that kind?
Bodie: I don't think there's a willingness from any senior bank lender to fund a deal such as this, unless the company has fundable assets in the background, in which case there will be some appetite from asset-based lenders. But for a cash flow-negative business such as Comet, there is unlikely to be any senior debt capacity or appetite to lend. Therefore, you're reliant on vendor financing, either in the form of vendor loan notes or a reverse premium where the vendor leaves behind cash in the business in order to fund losses and restructuring costs.
Looking more widely at the consumer sector, what types of business are you expecting to be able to pick up in the New Year sales?
Constable: Anything on the high street that has debt in it has got an issue. Any large retailer that has a tail of leases. If the business has leverage it only takes a small drop in turnover and they are really up against the wall. There's quite a few of them out of there in that situation. If you look at the retail sector as a whole, it is suffering from the switch to online. It’s so easy to buy online now and that switch is happening very quickly.
Keating: The other thing is the discounting. It's so prevalent now that you can't get a customer in the shop unless you've got 40 per cent off.
You've got to be clever about how you discount – you can bring people into the store by saying you've got 40 per cent discounts but then the goods you actually sell aren't as heavily discounted. The consumer always wants a bargain. Even some of the big-name brands are having to discount just to get people through the door.
Bodie: A lot of retailers seem to be discounting early in order to liquidate stock and exacerbating the problem come January. It may be a torrid time for landlords at the end of December.
Constable: They will want to get though to 3 January and then I suspect lots of banks that are funding these businesses will find they've recovered most of their money. They won't want to roll the dice and fund them again.
What other sectors are interesting? Jamie, Paul and Steve – you've all invested in construction-related companies – what opportunities are there in that area?
Constable: Construction is a shrinking market without a doubt. It's still very strong in London but outside of the capital it's really tough. Our view is there are opportunities to buy businesses that are very good at what they do but can survive with a lesser turnover than perhaps they had in the past. If you're good at what you do then you can survive within that market as long as you've created your overhead for a lower turnover.
There's an opportunity to pick these companies up relatively cheaply because of the issues that are going on in the market, but you've got to pick the ones that are really good at what they do.
Cartwright: We bought a couple of businesses at the same time. We took a view that if you're buying somewhere towards the bottom of a cycle, and taking into account the volumes of what these businesses are doing now compared with two or three years ago, if you get the right business then you can survive in this market or, arguably, a worse one.
We bought the businesses expecting it to be worse rather than better. You've got to be able to look at today's environment, take a very pessimistic view on that and still generate cash.