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It’s no time to be an under-capitalised business

Nick Hood, Business risk analyst, Company Watch.

The news that both Bonmarché and House of Fraser are considering public flotations says quite a lot about the confidence returning to the UK economy, as tentative growth finally becomes established after five long years first of recession and then flatlining. Other IPOs are said to be scheduled for the early part of 2014, driven by rising valuations.

The hype will all be about raising money for expansion and for investment in the technology and logistics required to keep these companies ahead of the dizzy pace of change in retail methodology.

But underneath this froth, many will also have their eye on reducing high debts before interest rates start to rise and destroy their viability. Many retailers, both large and small, continue to be overleveraged and the days of kicking the can down the road with periodic refinancings are almost at an end.

The debate over private equity funding models and their high risk/reward philosophy will rage on; most businesses will continue to generate sufficient profit and cash flow to support these precarious inverted debt/equity triangles.

But recent retail history is littered with object lessons in avoiding excessive borrowings; not least the Peacocks collapse, from which Bonmarché has emerged phoenix-like to prosper. Peacocks had more than £600m of debt when it failed, but the sum total recovered by selling all of the assets will be significantly under £100m.

This is no time to be an under-capitalised, overborrowed fashion business, especially as so many are also carrying stratospheric values for intangible assets in their balance sheets, from overpriced vanity acquisitions or IT development costs which technology change has undermined. The more they can use this window of market confidence as a chance to raise new equity and pay off potentially ruinous debts, the better and safer the fashion world will be.

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