Towards the end of 2001, furniture retailer Relyant Retail (Relyant) started experiencing huge financial problems. The company had hundreds of stores, selling everything from fridges to sofas, aimed at the lower-income market. It made most of its revenue from extending credit to customers.
But Relyant began to see poorer-than-expected sales due to decreased demand in an overtraded market. Combined with a high level of interest-bearing debt and rising interest rates, the company's borrowing prevented it from taking full advantage of trading opportunities.
As the company headed deeper into trouble, creditors began to worry about the effects of Relyant folding. More than 10 000 direct jobs would have been lost and a further 5 000 jobs in supporting sectors would have been terminated.
Total facilities advanced by a number of banks including FirstRand, Absa, Standard Chartered Merchant Bank and Investec were more than R1,35bn. FirstRand would have been hardest hit, with most of the exposure.
To avert disaster, FirstRand worked with the other banks and set up a consortium to draft a restructuring plan. This increased the authorised share capital to permit a conversion of preference shares to ordinary shares and a private placing of ordinary shares totalling R52m to Poco, a German-based retailer. A rights offer totalling R740m was also underwritten, firstly by Poco to the value of R306m, and then by the consortium to a maximum value of R434m.
Poco also injected valuable retailing experience to assist in the operational turnaround, through appointments to Relyant's board. Turnaround specialists helped to improve the retailer's credit rating, reposition some stores and overhaul the merchandising policy.
"It was in our interests to co-ordinate and execute the entire deal process between Relyant, Poco and the other consortium members," says Rand Merchant Bank business & debt restructure specialist Martin Leigh.
Now Relyant is back on track. The group showed a R633m attributable loss for the year ending June 2002. But after the R700m recapitalisation in September, Relyant posted attributable profits of R59,3m to the year-end June 2003. The strong growth has continued with attributable earnings reaching R121m for the six months to December last year.
The strong turnaround in Relyant's results is reflected in its share price of R1,45, a huge improvement on the rights offer price of 90c in September 2002.
Now Ellerine Holdings is eyeing Relyant to enhance its business operations. Ellerine says Relyant credit- granting procedures were a big factor in motivating the deal to the respective boards. The transaction is subject to competition commission approval.
Banks are crucial to the success of business rescue because they have the ability to detect early-warning signals, place special scrutiny on troubled clients, assess risks, provide options to management, evaluate management's turnaround plans, negotiate debt and, most importantly, safeguard their exposure.
"Contrary to public opinion, banks explore all options to keep a company trading before deciding to call in its loans," says Leigh. "They're realising that though they can't implement the turnaround, they can play an important role in ensuring its success."
