Bloodshed on the high street

Retailers battling to cope with the slump in consumer spending are expected
to undertake a wave of restructuring over the coming months in order to adjust
to the cruel conditions on the high street.

MFI, Focus, Ethel Austin and Maplin electronics have all been reported to
have either breached banking covenants, or are engaged in urgent negotiations
with lenders.

Covenants are negotiated on a company-by-company basis, but typically involve
linking interest payable on loans to profits, or establishing asset/liability
ratios.

Experts believe that the breaching of covenants and discussions with banks
are the first signs of widespread restructuring and belt tightening. Nick Hood,
a partner at corporate recovery specialists Begbies Traynor, said the firm was
expecting ‘autumn and winter to be busier than spring and summer’.

He added: ‘A breach of banking covenants is the first sign of distress and
acts as a trigger to warn banks when creditors are in trouble. Banks will try
and renegotiate the terms of the loan. In current conditions, doing that is like
rearranging the deck chairs on the Titanic. Restructuring looks to be the
approach companies will have to take.’

Focus, Ethel Austin and Maplin are owned by private equity groups, which are
going to be hit hard by economic conditions because they are so highly
leveraged.

David Ascott, head of private equity at Grant Thornton, said management
shake-ups and cost-cutting were imminent as private equity-owned groups prepared
for the tough times ahead. ‘The primary issue is sales and if a current
management team is not performing they are going to be replaced,’ Ascott said.
‘Groups will rationalise their portfolios, dispose of peripheral and
underperforming assets and cut spending and capital expenditure.’

Executing such strategies could prove tricky, Ascott warned.

‘Private equity in the retail sector would have grown aggressively before the
economic slowdown and undertaken a number of new store roll-outs. It is going to
be difficult to extricate themselves from these positions. Things like leases
are especially complicated to get out of.’

Amid the anticipated carnage and cut backs, though, there will be
opportunities to make attractive acquisitions. ‘Distraught business groups are
likely to slim down operations. A business making acquisitions might be able to
pick up cherries that way,’ Ascott said.

Hood said strong players would be in the market for ‘good, cheap assets’, but
warned that taking on extra capacity required thorough decision making. ‘In an
economy where management is already pushed to the limit, companies want to be
careful when making acquisitions,’ he said.

COMPANY REPORTS

FTSE250
Real Estate group Grainger Trust, the largest quoted
residential investor, said it was well positioned to pursue its ‘ambitious
growth plans’ after the first £450m of its £1.3bn syndicated bank facility
became available at the end of last month. The group said it expected revenues
for the year ended 30 September 2005 to be £132m, slightly lower than the £135m
reported for the 2004 financial year.

The maker of Durex condoms, SSL International, will report
its first results under IFRS when it releases interim results on 22 November.
The group said the impact of the new standards would be broadly neutral. SSL is
expecting interim sales to be approximately £220m, which, after adjustments for
currency movements, is 7% ahead of last year’s figures.

FTSE ALL-SHARE
AEA Technology has reduced its pro-forma net debt from £56.6m
at the end of March to £25m at the end of September. The group undertook a
restructuring programme, which saw it sell off its Coller Capital business and
cut more than 200 jobs. Despite significantly reducing its cost base in the
restructuring, AEA warned that ‘further action may be necessary’ as the market
was expected to remain difficult.

AIM
Hardman Resources, the oil company involved in a number of
joint ventures with other energy groups, has changed its accounting year-end
from 30 June to 31 December to align itself with other businesses in the sector.
The change will allow Hardman to synchronise its periodic reporting with the
annual budget cycles of major joint ventures, as well as the taxation reporting
requirements of the principal jurisdictions in which Hardman conducts its
activities.

Regal Petroleum has received a letter from regulatory
authorities in the Ukraine confirming that the group’s licences and permits in
the Ukraine for the Mekhedivsko-Golotovschinske and Svyrydivske gas fields are
valid. There had been doubts over the ownership of the group’s 20-year
production licences in the Ukraine. The group is still involved in a dispute
with former joint venture partner in the Ukraine, Chernihivnaftogasgeology. The
matter is set to be settled in court.