Dick Smith Scrambles to Refinance Debt

In October last year Dick Smith Holdings [ASX:DSH] dropped 45% in three days. Then in November, shares plummeted a further 57%. A 52 week low of $0.20. It just goes to show how profit downgrades and devaluing inventories can affect investor confidence.

Now it seems shareholders won’t need to stress about further declines in share value. Dick Smith entered into a trading halt as of Monday. Could this be the end for Dick Smith?

Dick Smith Jan 16

Source: Yahoo finance

The death of Dick Smith

Dick Smith’s board of directors have determined that the company is insolvent or is likely to be so in future. So Dick Smith has gone into voluntary administration.

Voluntary administration means Dick Smith has opted to appoint an administrator to handle the company’s finances. The administrator in questions is the advisory firm, McGrath Nicol who will attempt to put Dick Smith back together again.

McGrath Nicol will do their best to refinance debts, but only so much can be done. If refinancing is unsuccessful, Dick Smith will be no more. But if creditors agree to be paid back less than they are owed, there could be hope. Why would they do this? Simple. Creditors don’t want their debtors to go out of business. If Dick Smith is discontinued then creditors may lose future income. Therefore creditor would rather take the risk in taking less now to enjoy more later.

Another reason why creditors dislike their debtors collapsing is because of how capital is allocated. If Dick Smith cannot possibly repay their debts, the administrator will repay the largest creditors first. For example, if Dick Smith owed you a few thousand, or even a few hundred thousand dollars you might receive nothing. Because they would have to pay back their larger creditors first.

Unluckily for Dick Smith, right now their creditors seem unwilling to accept less than they are owed. Two of Dick Smith’s creditors, NAB and HSBC, have appointed a receiver to deal with the situation. The receiver’s job is to collect the amount that is owed to the creditor. Debts can be collected by either retrieving capital or by selling the debtors assets.

Will Dick Smith resume trading?

The trading halt was issued on Monday so Dick Smith could make an announcement about its ‘funding position and debt refinancing covenants’. Many analysts believe it could be the end of the road for Dick Smith.

Steve Johnson, Forager Funds chief investment officer said ‘I wouldn’t be surprised if the company is not able to resume trading on Wednesday and instead seeks an extension of time to continue trying to re-finance its debt.

Sure, Mr Johnson could be right. But Dick Smith has announced no such thing as of yet. The company plans to tell investors of their refinancing situation in the next few days.

Härje Ronngard,

Analyst, Money Morning


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