With apologies to Monty Python fans.
The FT today had a great story last week about how hard the convenience store industry is:
The pressure on British corner shops has been highlighted by store chain Nisa, which revealed sales growth lagging the broader grocery market. The wholesaler on Friday reported that like-for-like sales increased 0.8 per cent in the six months to October 1, lower than the rate of inflation and the sector as a whole. However, overall revenues grew faster as it attracted new store owners. Kantar Worldpanel has reported that supermarket sales jumped 3.6 per cent in the 12 weeks to September 10.
This coincided with Bibby Line Group getting an extension to publishing their 2016 accounts until 30 Nov 2017. I also noticed that while BOHL has filed its 2016 accounts Bibby Offshore Limited (the UK business) hasn’t, a move I struggle to see as an oversight. Bibby Line Group is of course significantly exposed to the convenience store industry through it’s ownership of Costcutter and it is simply impossible to believe they have traded better than the market on average.
I understand that Bibby Line Group is set to report a substantial loss for the 2016 year and clearly the Bibby Offshore situation is related to their late filing of accounts. A quick recap of Bibby Line Group’s 2015 KPI’s highlights why their support for Bibby Offshore has been verbal rather than financial:
Source: BLG 2015 Annual Accounts
In 2015 BLG managed to generate a mere £9m operating profit from £1.4bn in sales. That is a lot of effort for a rounding error. And that wasn’t a one-off as their graphic makes plain. In case you are wondering how a profit before tax was generated the Group P&L makes clear:
Basically £40m from asset and company sales. Without that BLG would have recorded an £11m loss before tax.
I am not going to get into consolidated accounting here but the crucial thing for anyone expecting a rescue of Bibby Offshore from Bibby Line Group needs to see BLGs 2015 cash position and make a realistic assessment if it can be any bigger now than then?
BLG had a mere £12m cash at the end of 2015 and as you can see from the KPIs above the business trajectory was not improving. Frankly it’s barely enough to pay for some expensive lawyers in Bishopsgate to tell you what to do. It is certainly nowhere near enough to buy a serious seat at the creditors table when you have a subsidiary that owes £175m and is burning through extraordinary amounts of cash (even assuming you had the inclination to do so). It is certainly not enough to risk a £10m guarantee to Barclays.
Back in January BOHL claimed that Barclays were extending the RCF, then in May it became they would have to cash collatoralise this for a smaller amount, and still, 10 months later this facility, the core of the going concern assumption appears not to have been executed. This paragraph from the BOHL June 17 accounts make clear how how conditional this facility is:
It is therefore verging on absurd I think to suggest that BLG would then cash collatoralise a Barclays Revolver Credit Facility for c. £8.1m that would allow Bibby Offshore to make the next interest payment in December. This long awaited guarantee (that was reduced from an initial £30m to £8m), which would benefit the equity owners at the expense of the bondholders and would appear to be suspect at least, appears to have been the only basis for the going concern assumption in the last BOHL accounts. This is a facility that has been in negotiation since January and is still subject to BLG Board approval! Unless BLG has had a cash infusion from somewhere in the ether in 2016 their ability to follow through and approve the Barclays RCF does not appear credible.
It also seems pretty obvious from the BLG accounts that the £20m dividend taken from Bibby Offshore in 2015 was used to pay loan notes and bank facilities owed at the Group level. The key to all this is the investment in subsidiaries:
Somewhere in that £153.8m is the equity value of Costcutter and Bibby Offshore (and Woodland Burial which bizzarely may be material for 2016). There is an enormous impairment charge coming one suspects, even more enormous if Bibby Offshore is not refinanced soon. The only reasonable assumption for the late filing of the BLG accounts is:
- BLG are in a disagreement with the auditor as to the value of BOHL and therefore more time is needed to resolve this
- BLG have cannot prepapre the accounts because the values of investments are so uncertain
- BLG are trying to hide something until the last possible moment
I have stated before I believe, as does the market given current bond price levels, that the equity value in BOHL is zero. Accounts must reflect all events up to the signing date and if the equity value is zero then BLG looks likely to have to restate its 2016 accounts to reflect this, at the very least it will be a significant post-balance sheet date event that will require disclosure, but the net effect is the same. I don’t know the exact value of the investment in Bibby Offshore but it is surely north of £50m? A writedown of this scale would fundamentally transform the BLG financial position. It would also look extraordinary for BLG to support Bibby Offshore when the entity has no book equity (you could make an argument for option value maybe)? I don’t think BLG ever really believed how bad things were getting at BOHL, and never had any intention of actually having to approve the Barclays facility: BLG thought announcing it would buy them some time and a seat at the creditors table. Now as the denouement approaches the fallacy of this strategy is becoming all too apparent.
Because I have either missed something really obvious, and you should never completely rule that out (I missed Bibby selling the ROVs in Asia and getting USD 7-10m in my August prediction), or you are being asked to believe that (a) high profile hedge fund(s) are paying .28-.36 of the bond, which values Bibby Offshore at c. £55-60m, for a company losing money at operating profit at the rate of 100k per day for assets that you could liquidate for substantially less (the Sapphire and Polaris would be lucky to recover USD 30m in a fire sale and it might cost you USD 5-10m to get that). These assets are held in the BOHL accounts at £78m so if a hedge fund has brought in hoping to sell them for that I suspect someone is getting a much smaller bonus this Christmas than they were hoping for. As a general rule, and I admit I should know, buying assets for 60 and selling them for 30 is not a great investment proposition.
The idea just seems so fantastical to me I really can’t believe anyone would sanction such an investment but I was assured that this was apparently an asset play this morning by a shipbroker! Surely someone running institutional money can’t really believe that a 1999 build DSV and a 2003 build DSV, both well and truely of the previuous generation of DSVS, without ever having the hope of a mortgage again, could really be flipped for a profit in this market (or even the next one if it ever recovers)? If true, when the hedge funds involved realise they have been sold a total pup, and the consultants they employ make them aware of the cash burn rate to even stay at the table, you can expect the end to be brutally quick here. These investors would literally have got involved in an asset play without understanding the assets? But the only other option is to be paying £60m for a company that requires £10-15m more just to trade through to the next summer season, has minimal backlog, and a hugely loss making US office? It’s almost as nonsensical as buying the company for Sapphire and Polaris.
The strategy may make sense for an industrial buyer, who could strip out some of the costs as synergies and take a 15 year view on the assets, but it makes no sense for an investor who has to run the company as a standalone unit and needs an exit strategy.
Yet even more nonsensical still the Bibby Offshore back-up plan is apparently the parent company presented above as a “supportive shareholder”? The only way this shareholder could really appear to support the company would be to move out of the way,
I suspect EY are not just involved with Bibby Offshore, but also BLG, who to be clear are unlikely to have the going concern issue that BOHL clearly does, but may well have covenant and other issues associated with material balance sheet writedowns. The contrast between the Norwegian restructurings, most of which were EBITDA positive, and where the shareholders have contributed substantial new equity, could not be clearer.
The 2016 BLG accounts, published almost in 2018, promise to an interesting read.
[Disclosure of interest: I consult for companies in the subsea and alternative investment industry but I have no financial interest in Bibby Offshore Holdings Limited, the Bibby Offshore Bonds, nor am I advising any party who I believe to be trading in the bonds. These are my own views and I have not been paid or asked by anyone to write this blog post.]