Debt facilities Difference between unsecured and secured becomes...

Debt facilities

Difference between unsecured and secured becomes important if HIL entered external administration. If the facilities are:

• Unsecured: Banking syndicate's priority to repayment of its debt is the same as an unsecured creditor (i.e. end of the creditor queue)

• Secured: Banking syndicate can appoint a Receiver/ Voluntary Administrator and has higher repayment priority than most creditors.

Switching from an unsecured position to secured, and reducing the facility limit by half at the same time, gives the appearance (all other things being equal) that the banking syndicate is likely concerned about:

• the risk of HIL defaulting on its facilities

• its exposure at default (i.e. debt outstanding) if HIL did default

• trying to minimise their loss given default (i.e. how much would be written off if HIL defaulted - as defined in Risk Models developed under Basel II).

In the FY15 annual report it said (page 10) that the Feb-15 facility renegotiation led to facilities that were on 'substantially better terms and pricing than the previous facility.' Whilst you could be correct it would appear unlikely HIL would be going back to the Banking Syndicate 10 months later to get even better pricing on a 3 year facility. The announcement also stating that the Banking Syndicate and HIL would 'work together to refinance its reduced facilities by the end of February' could either likely mean reducing the facility limits again or the Banking Syndicate telling HIL it needs to get its banking done somewhere else.

The nature of the announcement leads me to speculate that HIL's facilities are currently being managed in 'bad bank' (i.e. teams that actively manage debt exposure with poorly performing entities) rather than with regular relationship managers.

In saying this one of the risks from switching the facilities from unsecured to secured is that the Banking Syndicate's security over the circulating assets of HIL (namely cash, debtors and inventory) would be void as against a Court appointed liquidator (s588FJ Corporations Act) if it were enforced within 6 months of its creation (outside of a few exceptions in s588FJ(2)).

http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s588fj.html

Given the majority of HIL's assets at Jun-15 appear to be circulating assets this could be an issue if a decision to enforce security needed to me made within the 6 month time period (as the burden of proof (a big one) would be on the Banking Sydnicate to prove HIL was solvent at the time the security over the circulating assets was obtained).

This was a similar issue for DSH, NAB and HSBC secured its facilities on 22 June 2015 and appears to have commenced discussions with DSH management about the facilities on 22 December 2015 (based on McGrathNicol's Declaration of Independence, Relevant Relationships and Indemnities provided in the first Circular to Creditors).

WOW contract

If a buyer was found for Masters (and they acquired the entities operating the Masters business - similar to Anchorage's acquisition of Dick Smith from WOW in 2012) and continued to operate the stores then there shouldn't be any issues with the HIL contract.

If WOW winds down the Masters business then (unless HIL can extricate itself from the contract and find another retailer for the Hills products) you would assume HIL would start to receive less revenue from the contract as the wind down takes place (as the likely revenue would reduce to only incorporate the minimum contract payment obligations as sales of Hills products decline).

I think at the moment the market believes the wind down scenario is the more likely of the two and this is probably being reflected in the HIL share price (among other things).