I think the insolvency provisions are fair. If the secured creditors are responsible for paying the Receivers costs, and are appointed by the secured creditors, their primary duty is to the secured creditors - the secured creditor shouldn't need to pay for their external administrator to report to others. In DSH's case there is an Administrator who can monitor what the Receiver is doing and report to other creditors and shareholders.
What I think could be improved would be:
• More regular financial reporting to the ASX (say quarterly) - would have made it harder for DSH management to hide the significant deterioration in financial performance in 1H16 if they needed to report 1Q16 results in mid November (including update on October trading and likely trading for 2Q16)
• Better IPO disclosures (e.g. when preparing an IPO you need to disclose 3 years of P&L data but only the most recent balance sheet and no cash flow information based on ASIC RG 228). If Anchorage were selling to a trade buyer or another PE firm (or even doing their own due diligence) they wouldn't accept one balance sheet and no cash flow information. Historical balance sheet data would have enabled working capital analysis and an assessment of working capital adequacy Historical cash flow data would have shown the significant inventory reduction more clearly for investors
• Maybe a longer disclosure period (currently 7 days from prospectus lodgement). Anchorage needed to lodge a new prospectus with ASIC on 21 November 2013 (to update their 14 November 2013 one with an additional 10+ pages of material) but required institutional investors to lodge their request for stock at the end of the original 7 day disclosure period
• Allowing directors to trade a business whilst insolvent, as long as not done recklessly and based on a plan developed with a restructuring specialist, if it provides a better chance for the business to continue as a going concern than external administration (Coalition government's innovation policy is looking into this matter)
• Improve disclosure requirements with respect to inventory and creditors in financial reports. Financial reports need to provide an ageing of trade debtors (including bad debt provisions) but no such disclosures are required for inventory and creditors. If the annual reports of DSH had this ageing information for inventory and creditors the troubles they were facing might have been more evident to investors sooner
• Requiring historical financial reports to be lodged with ASX at same time prospectus is lodged (not at the time of listing). If this was required people would have had easy access to the 2013 Dick Smith Sub-holding Pty Ltd accounts (as the notes in these accounts were substantially the same as those used by Forager Funds in their October 2015 article on DSH based on 2014 financial account disclosures - only they would have been available to potential shareholders at the time of listing). The 2013 accounts were available on ASIC 2 weeks before the original prospectus was lodged but would have required people to know where to find it and pay $35 to download it
• Ensuring all business acquisitions are reported in financial accounts. It appears Mac1 Pty Ltd, a Apple product reseller, was acquired by DSH in September 2014 but was never disclosed to the market or in financial accounts. The DSH IR contact noted in a media article that this business had loss making stores being closed down by DSH six months after the acquisition (http://www.crn.com.au/News/401559,dick-smith-electronics-buys-mac1-for-1.aspx). Interestingly Ferrier Hodgson are not appointed to this entity so possibly DSH management didn't disclose the nature of this entity to NAB/HSBC when they refinanced WBC's facilities on 22 June 2015. It is also possible the $30m trade finance facility obtained by DSH from Macq Bank to acquire Apple inventory (when Apple cut off credit terms prior to Christmas) went through this entity as it was not part of the NAB/HSBC security structure and therefore didn't need to be disclosed to NAB/HSBC. If this occurred it might explain why NAB/HSBC lost faith in DSH management when it was eventually disclosed to them after Christmas when they needed to repay $10m to Macq Bank at a time when it appears DSH had maxed out its facilities with NAB/HSBC.
DSH Price at posting:
35.5¢ Sentiment: None Disclosure: Not Held
