Greybull Capital has been associated with a string of bankruptcies but is financially healthy itself.
Steelmaking is a crucial sector for all industrialised economies. It was privatised by the Conservative government in 1988 and has since stumbled from one crisis to another, culminating in the appointment of liquidators for British Steel Limited (BSL).
Some 5,000 jobs are directly under threat, as well as another 20,000 jobs in the supply chain. The roll-on effect on the sector and local economies could threaten tens of thousands of jobs.
Private equity wreaks havoc
The latest crisis at BSL began in 2016 when Tata Steel sold the company to Greybull Capital, a private equity entity, for £1.
Government should have seen the dangers as private equity is the equivalent of Dracula to blood banks. Greybull has been associated with a string of business bankruptcies.
For example, in 2012, it bought electrical retailer Comet for £2, but a year later it entered administration.
In 2012, it acquired Rileys, snooker halls and sports bars, and by 2014 it ceased trading.
In 2014, it acquired Monarch Airlines and by 2017 it entered administration, leaving 860,000 passengers stranded.
In 2015, Greybull bought M Local convenience store chain from Morrisons and it was closed in 2016.
Greybull did financially well and has little difficulty in securing resources. This invites a brief overview of the business model of private equity.
Financial engineering and asset stripping are central to private equity business models.
It invests little in the share capital of the acquired company. Instead, it saddles companies with secured loans.
These are provided by friendly banks and intragroup entities, often located in offshore tax havens which do not levy corporation tax on profits made outside that particular jurisdiction.
The interest payments qualify for tax relief in the UK and reduce tax liability of the company.
This enables the owners to extract high returns from the business in the form of interest payments.
When the financial rug is eventually pulled, the owners and friendly banks ranking as secured creditors walk away with most of the proceeds from the sale of assets, leaving next-to-nothing for unsecured supply chain creditors.
British Steel – another victim
Greybull operates through complex corporate structures. BSL is owned by British Steel Holdings Limited (BSHL) which in turn is owned by Olympus Steel 2 Limited, a company incorporated in the secretive tax haven of Jersey.
There are numerous other related entities which adds complexities to understanding its financial affairs.
Greybull put £1 into the share capital of BSL in 2016. Soon afterwards, it was loaded with a loan of £154m from Olympus Steel, repayable in November 2019.
The interest on this is payable at the rate of 9% + LIBOR. The current LIBOR is 2.64%, so BSL pays its Jersey-based owner interest at the rate of 11.64%.
In 2017 and 2018, BSL paid interest of £17m per year on intragroup loans. Greybull also charged a management fee of £3m in 2018.
High cash extraction in difficult trading conditions and failure to modernise contributed to BSL’s financial downturn.
The 2017 pre-tax profit of £92m turned into a loss of £29m in 2018. BSL’s cash balance plummeted from £35m to £5.1m. Directors collected remuneration of £3,299,000 (2017, £2,007,000),
The losses and dwindling cash should have raised concerns about BSL’s ability to remain a going concern.
On 12 July 2018, BSL’s auditors Deloitte gave the company a clean bill of health and asserted that its financial statements were ‘true and fair’.
In relation to going concern, Deloitte said: “we have nothing to report in respect of these matters”.
Deloitte collected £475,000 in fees from BSL and its parent company, including £66,000 for tax and other consultancy services.
The 2018 collapse of Carillion raised concerns about the inclusion of dubious intangible assets in the company’s balance sheet.
This has not resulted in any change to accounting practices. BSL’s 2018 balance sheet includes £4.3m for “software and development costs”.
This is imprudent as the software is business specific and unlikely to be of much use to anyone else.
A prudent practice would have been to expense it, which would have resulted in a higher reported loss and possibly greater urgency for scrutiny of BSL.
Whatever the outcome of BSL insolvency, Greybull is likely to recover most of the debts due to it. Some £331m is owed to supply chain creditors and HMRC who are unlikely to recover anything substantial.
The arrangements by Tata Steel and The Pension Regulator (TPR) before the sale to Greybull safeguarded most of the pension rights accruing to employees, but the accounts of BSHL show a deficit of £46.5m on three other pension schemes operated by the group.
How safe are these schemes and how is the deficit going to be addressed?. Hopefully, the regulator will clarify.
The collapse of BSL once again highlights the dangers of private equity and shareholder-centric model of corporate governance.
The government has no effective industrial strategy and has been content to leave everything to shareholders, directors, auditors, asset-strippers, takeovers and merger bazaars.
Without major reforms of corporate governance and insolvency more disasters are inevitable.
Prem Sikka is a Professor of Accounting at University of Sheffield, and Emeritus Professor of Accounting at University of Essex. He is a Contributing Editor for Left Foot Forward and tweets here.
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