Myer’s writedown becomes existential

Garry Hounsell. Picture: Aaron Francis/The Australian

It’s a good thing auditor cum retail turnaround specialist Garry “Call me old fashioned” Hounsell knows his way around a balance sheet.

That meant the Myer executive chair could speak in the lingo with his old colleague and now PwC partner Jason Perry, who has the lucky job of being the rapidly deteriorating department store group’s independent auditor.

Hounsell and the Melbourne-based Perry know each other from way back when Hounsell was a partner and then boss of accounting firm Arthur Andersen.

The then up-and-coming accountant Perry was a senior manager at AA from December 1994 to May 2002, which entirely overlaps with Hounsell’s tenure as an audit partner and then managing partner at the firm from 1989 to 2002.

Isn’t Melbourne a small town?

Fast forward to Wednesday, when Hounsell revealed a $513 million writedown (before tax) of the value of Myer’s intangibles from $1 billion at this time last year to $468m now, which the chairman said had been done in consultation with the company’s auditor.

The importance of the size of the writedown cannot be overstated.

Thanks to the impairment, Myer is now just $80m away from breaching one of the covenants attached to its backing facility — the one relating to shareholder funds, which must remain at more than $500m and which now is at a perilously close $580m.

A capital raising would have boosted shareholders’ equity, but given the crankiness of 10.2 per cent shareholder Solomon Lew and the sorry state of Myer’s share price that was never a practical option.

That made the size of the writedown existential.

If Myer breached its agreement with lenders it could trigger all sorts of potentially fatal scenarios.

Myer’s funding facility expires in August and it is now negotiating a fresh agreement with the syndicate which is led by Shayne Elliott’s agile ANZ.

Hounsell would want to get cracking on the new terms before his old colleague Perry flags the need for any further writedown that would trigger a covenant breach.

Sure, the pair go way back — but Perry is, of course, a consummate professional.