Bad Blood With Bankers May Have Caused Dick Smith’s Collapse

Dick Smith could have survived with the support of its banks, according to sources close to the now collapsed chain. The administrators’ report into Dick Smith will reveal the business could have survived with the support of its banks, according to sources close to the collapsed chain, who claim bad blood between the electronics retailer and its key bankers sealed the fate of the once iconic chain.

Dick Smith’s relationship with National Australia Bank and HSBC was barely six months old when the retailer announced a $60 million inventory write-down in late November and revealed it was “unable to re-affirm the profit guidance previously provided”.

It’s not clear why the banks didn’t receive any smoke signals about the impairment charge but it’s believed to have rocked the relationship and damaged NAB’s trust in senior management, including chief executive Nick Abboud.

It’s understood the partnership was further strained by Dick Smith’s repayment to Macquarie in December on a unsecured loan provided to cover the upfront payment for Apple stock after the tech giant withdrew supplier credit in about October.

It is believed NAB’s trust in senior management, including chief executive Nick Abboud, was damaged. Photo: Louise Kennerley

When receivers Ferrier Hodgson took control of Dick Smith in January, the chain was faltering under the weight of more than $400 million in debts, including $140 million to its banks.

One source said banks “hated surprises” and NAB and HSBC were hit with several in quick succession from Dick Smith.

He said the bank was “shocked” by the stock write-off and the payment to Macquarie further inflamed the situation.

Dick Smith’s relationship with its banks is believed to have played a significant role in the collapse of the business. Photo: Jessica Hromas

“NAB was annoyed Dick Smith paid off an unsecured lender [Macquarie] ahead of reducing its facility with it, a secured lender,” he said.

By December the bank had put its own people into Dick Smith and senior executives claim it was providing daily sales updates to try and shore up support but it ultimately failed and in January Dick Smith’s board was forced to appoint administrators after NAB and HSBC withdrew their support.

Receivers took control of the business in January and Ferrier Hodgson pulled the pin on the band in late February, after failing to negotiate a sale of the business, opting to shut down the chain in Australia and New Zealand, putting close to 3000 people out of work within weeks.

The Federal Court has granted Dick Smith’s administrators McGrath Nicol a six-month extension to the schedule for its second creditors meeting, which means it won’t be held before August 9.

The receiver’s first report on Dick Smith’s New Zealand operation has identified a $NZ98 million shortfall in the funds available for priority creditors, and Ferrier Hodgson said it could not estimate how much of the $NZ32.8 million in stock would be recovered through its current fire sale through the network of 62 stores.

Senior sources at Dick Smith claim the banks acted precipitately, panicking over a “cash-flow pinch” or a seasonal spike in debt that the business could have traded through.

Dick Smith reached out to the chain’s former owner private equity firm Anchorage Capital Partners, the same group that reaped $264 million from the float of the chain, in December as it grappled to find alternative financial support.

One of Mr Abboud’s former colleagues said he was “shocked” by the deterioration in the relationship with its banking syndicate, which had broken down in a matter of months.

Anchorage has faced fierce criticism over its role in the collapse of the retailer, which it bought for about $94 million before listing it just over a year later for $520 million.

The private equity group refuses to pick over the entrails of the operation but it’s steadfast in its defence, claiming the business was debt-free for more than a year after its public float.

Anchorage is expected to be called before a Senate Inquiry into the collapse of listed retailers later this year, after Independent Senator Nick Xenophon championed the cause of gift card holders blind-sided by Ferrier Hodgson’s decision not to honour the store vouchers.

This article originally appeared in Business Day, the complete view of business published on Fairfax Media websites. Follow Business Day on Facebook and Twitter.

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