Arnotts needs radical solution to debt woes

After five years of uncertainty about its ownership structure, the next five months will prove crucial in shaping the future of Irish retailer Arnotts.

In store, the venerable Henry Street trader has been reinvigorated. A €3.5 million investment programme in the past few years has transformed the look and feel of the department store and brought a raft of new brands including Magee, Brooks Brothers, Orla Kiely and Lulu Guinness.

Clodagh McKenna has sprinkled some celebrity magic dust on a couple of its restaurants while Bewleys has brought its famous coffee brew to the store. Yet the reality is that the company is merely marking time against a backdrop of weak continued consumer demand and a back-breaking debt load of €370 million.

A senior debt facility of €206 million is due to be repaid next month while a working capital facility of €20 million expires in January 2014.

Like-for-like sales rose by 2 per cent last year but Arnotts still made a loss of €3 million due to various financial charges.

A radical solution to its debt problems is required to put the company on a sustainable footing. Arnotts' debt pile is a legacy of the folly of the Northern Quarter commercial development pursued by former owner Richard Nesbitt and part-funded by Anglo Irish Bank. It was one of a number of big-ticket projects from the Celtic Tiger era that failed to make it from paper to pavement. Perhaps spurred by the dramatic liquidation in February of Anglo's successor bank Irish Bank Resolution Corporation, Arnotts' management team is now working on a plan to comprehensively restructure its €368.6 million in debts.

Investec was hired recently to sniff out groups that might be willing to refinance the IBRC portion of the loan, which stands at about €230 million.

Ulster Bank is owed the balance and has indicated its willingness to participate in the reshaping of Arnotts' balance sheet. It's not clear what level of haircut will be involved for the lenders but we can assume it will be big. There is a fly in the ointment. The special liquidators of IBRC have been instructed to sell the bank's loans at current market value. If they cannot achieve that price, the loans will be shipped to the National Asset Management Agency at the end of the year. With respect to Nama, no trading business wants to end up there. It's a form of limbo that could strangle the life out of a living, breathing business.

So lining up a potential acquirer for its IBRC loans is sensible housekeeping by Arnotts’ board. Their difficulty is to second guess the market value of the loans as per an exercise conducted by UBS on behalf of IBRC’s liquidators.

Price it correctly and Arnotts’ profile will change dramatically. Get it wrong and its future remains uncertain.

There’s an old saying that retail is about detail. It was never more apt than in the case of Arnotts and its IBRC loans.