Harris Scarfe Suppliers Set To Be Hit For Millions After Deal Cut On Secured Debt
Appliance distributors are set to be hit for millions of dollars following the collapse of Harris Scarfe and the confirmation that that unsecured suppliers will ‘most likely’ fail to get a return.
ChannelNews has been told that one Sydney based distributor is facing having to write off over $400,000 while a Melbourne based distributor is facing losses of over $1.1M from the collapse of the loss making South Australian retailer whose debt was flogged off days out from the administrators being called in.
Investigations have revealed that syndicate of Australian banks and global retailer Steinhoff International sold their debt in retailer Harris Scarfe weeks before it collapsed, leaving unsecured creditors including distributors such as Electrolux, Spectrum Brands, Tempo and several other suppliers chasing their debt.
Several distributors have told ChannelNews that their insurance will cover some of the losses.
According to the Financial Review Steinhoff International the original owners of Harris Scarfe before it was sold as a job lot along with the ANZ Bank, National Australia Bank and Deutsche Bank sold $500 million of secured debt to private equity company Allegro Funds last month as part of Allegro’s acquisition of Greenlit Brands who renamed their Company from Steinhoff after an accounting scandal.
The retailers sold included Harris Scarfe, Best & Less and Postie Plus.
“It was a job lot – if you bought the equity you had to buy the secured debt,” one source said.
Others said it was a case of “bugger the suppliers”.
The three banks had signed a new $256 million financing package with Greenlit Brands in September last year, while Greenlit Brands’ $334 million inter-group debt to Steinhoff, its global parent company, was subordinated to the bank facilities.
Another big loser is set to be shopping centre owners.
The listed Scentre Group, owner of the local Westfield empire, and Stockland, are among big-name retail operators set to be hit by the collapse of the retailer who operates 66 stores including 24 in Victoria, 13 in NSW and nine in South Australia.
Scentre is landlord to 10 Harris Scarfe stores, with Stockland lease out five stores, while four are in Vicinity malls and two in GPT centres.
Morgan Stanley said there were 21 stores located in malls owned by the listed REITs it covered.
A typical store spans 3000sq m, and being a mini-department store, would have rents of about $300 per sqm.
Harris Scarfe’s receivers Deloitte are confident of selling the retailer as a going concern despite several big retailers telling ChannelNews that they are not interested in taking on a “loss making” retailer due to current market conditions.
The sale of the bulk of the secured debt to Allegro was a key part of the deal and has enabled the private equity firm to take preference over other creditors after pulling the plug on Harris Scarfe. Several suppliers that ChannelNews has spoken to claim that they were not contacted told about the debt sale or that the imminent collapse of the retailer.
Allegro claim that they conducted due diligence on the retailers they acquired from Greenlit Brands but quickly concluded that Harris Scarfe could not continue in its current form, so they called in the administrators.
One distributor who does not want to be named at this stage said “This is another Dick Smith; an investment Company gets involved and suddenly its bugger the suppliers. They will still get a return on their actions but not the suppliers to Harris Scarfe”.
According to some reports Allegro hired Deloitte to contact landlords to ask for rent reductions and store closures, but landlords declined, saying the demands were too great, forcing Allegro to appoint administrators and receivers.
“It became apparent the level of equity that would be needed to right size the business was prohibitive,” one source close to Allegro said on Thursday. “So, for this business to stand alone it would need significant restructuring.”
Deloitte partner Vaughan Strawbridge is confident Harris Scarfe can be restructured and sold as a going concern. Many in the consumer electronics and appliance industry disagree “Why would anyone want to buy Harris Scarfe when Woolworths can’t sell Big W and Wesfarmers had trouble offloading their retailers and they were delivering profits”.
He said, “We have had a number of approaches yesterday and today and there are some good calibre parties in that list,” he said.
Sources have dismissed suggestions Harris Scarfe owed money to suppliers before it was sold to Allegro, but the administrators will investigate whether the company traded while insolvent.
It has been confirmed that unsecured creditors are unlikely to receive a full return.