A wander down your local high street will reveal a retail sector in crisis. A flood of high profile British chains have gone bust recently, from home furniture store Habitat to novelty gift retailer Hawkin's Bazaar to lingerie specialist La Senza. Thousands more small businesses closed their doors in 2011, leaving 14 per cent of shops on the average British high street vacant. In January, Peacock Group, the owner of discount fashion brands Peacocks and Bonmarché, became the latest company to go into administration. The Cardiff-based company has appointed professional services firm KPMG to help save the business, but with up to 11,000 jobs at risk, it's the biggest retail disaster since the collapse of Woolworths in 2008.
What went wrong?
Tough economic conditions on the high street, resulting from tightened consumer spending and a shift away from town centre shopping - where most Peacocks stores are located - to out-of-town retail parks, have made the past few years challenging for the brand. Furthermore, owing to cotton price rises, Peacocks has been forced to put its own prices up recently, driving bargain hunters to cheaper competitors, such as Primark. Peacocks has also been balancing precariously on a growing mountain of debt. The company, which has an annual turnover of £720 million, owes its creditors £750 million, rendering it insolvent.
To fund an ambitious expansion plan, the chief executive of Peacocks, Richard Kirk, borrowed £460 million in 2006. Most of its debt was traditional bank loans from RBS, Barclays and Lloyds, but a proportion came from Payment in Kind (PIK) notes. A PIK note is a kind of corporate bond with a high interest rate, which gives the issuer the right to make loan repayments in the form of further bonds, with payment of interest deferred to near the end of the bond's term.
PIK notes allow companies to grow quickly when times are good, but by putting off principal repayments and interest payments, they lead to an ever-swelling debt pile that's difficult to pay back when times are tough. Peacocks called in KPMG last September to conduct a review of the company's debt, but problems have since escalated, and reached crisis point when RBS refused to pump any more cash into the business.
Solving the problem
Although entering administration sounds dramatic, it's an effective way for insolvent companies to carry on running their business, saving jobs and preventing further losses. Administrators step into the shoes of the management and take on responsibility for running the insolvent company in question. They act in the interest of the creditors to ensure that their debts are repaid, while also attempting to find a buyer to rescue the company. KPMG has already sold Bonmarché to the private equity group, Sun European Partners, and administrators from the Big Four firm are also holding meetings with potential buyers for Peacocks' portfolio of 418 stores. In addition, the administrators review staffing levels and deployment - KPMG has made 250 staff at the company's Cardiff headquarters redundant so far - and negotiate with suppliers, landlords and customers to manage the flow of the company's finances.
With a recession forecast for 2012, the economic conditions on the high street are unlikely to pick up any time soon. But the future looks promising for Peacocks: KPMG has reported huge interest from buyers so far and, if the debt can be successfully restructured, Peacocks' loyal customer base and strong sales will save the company.