Dick Smith read the last rites

With Dick Smith Holdings, debt providers NAB and HSBC took on a dog and Westpac dodged a bullet.

As far as debt deals go the $135 million in working capital and overdraft facilities from National Australia Bank and HSBC to Dick Smith won’t go down as one of the better decisions in Australian banking history.

The lucky beneficiary was Westpac, which was the major debt provider to the hapless retailer before this deal signed in June last year.

NAB and HSBC took on a dog and Westpac dodged a bullet.

This happens in banking all the time — it’s just on this occasion NAB and HSBC were on the wrong side of the ledger.

That explains their reluctance to throw more money at Dick Smith and why receiver James Stewart, at Ferrier Hodgson, has the business up for sale.

The electronics retailer has $140 million in secured debt (NAB and HSBC) and $200 million of unsecured creditors, who are mainly suppliers of the goods it sells.

HSBC took the $60 million overdraft, NAB the 18-month, $35 million revolving multi option working capital facility and NAB’s New Zealand offshoot a three-year, $40 million multi-option working capital facility.

In appointing McGrath Nicol as voluntary administrator the company noted “while confident on the long-term viability of the company the directors have been unsuccessful in obtaining the necessary support of its banking syndicate to see it though this period.”

In other words Dick Smith chair Rob Murray blames NAB and HSBC for not backing the company as it trades through a difficult period.

You have to blame someone and the intent was more to state the facts than cast blame.

NAB and HSBC, after saving Westpac some headaches, were not in the mood to throw more money after bad.

With a voluntary administrator and receivers appointed the intent is to keep Dick Smith’s 393 stores running, but the issue the company faces is buying new stock when it has no spare cash.

Christmas is the key time of year for retailers and a cynic would say the banks let the stores run in the hope of a Christmas miracle.

The facts were Dick Smith’s Christmas sales were weak, in part because the slashing of prices to get rid of excess inventory in effect cannibalised the sales of other product.

Earnings before interest, tax, depreciation and amortisation went down in a hurry and after topping $75 million last year are forecast to be negative this year.

Last November’s $60 million writedown was really the final straw and this week’s moves just the last rites.

Of course the law prevents the company from trading while insolvent and there is no suggestion this happened in this instance.

The company has 3,300 staff and 393 stores, of which 62 are in New Zealand.