What was remarkable about the financial restructuring of HEMA?

In March 2020 during the first Corona wave, Dutch retailer HEMA announced its intention to radically restructure its capital base. What followed was a well-prepared sequence of legal proceedings and public relations efforts to execute the chosen path of de-leveraging the company. What observations can be made and what questions come to mind?

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Please refresh my memory. What was the HEMA financial restructuring all about?

By October 2020 HEMA had completed a series of legal proceedings in the US (Chapter 15), the UK (Scheme of Arrangement) and the Netherlands (enforcement of Dutch share pledge) that reduced the company’s debt load, in nominal terms, by approx. €450m. Senior bondholders (SSNs) converted half of their €600m position into 100% of the equities and, for the other half, received new bonds with a slightly higher coupon. Subordinated bondholders (SNs) were forced to ‘contribute’ €150m by a full write-off of their bonds.

The banks (ABN AMRO, ING and Credit Suisse), holding a €80m super senior revolving credit facility, accepted the new owners and kept the working capital lines in place. A sub-group of SSN holders provided a relatively small amount (net proceeds to the company of €38m) of new priority debt mainly used to cover the steep transaction expense that tend to come with these types of endeavours.

Throughout the restructuring, HEMA continued to operate as a going concern company. Shortly after the financial restructuring, in December 2020, the new senior bond holders turned owners rapidly sold the company to an entity jointly controlled by the shareholders of Dutch supermarket retailer Jumbo and Dutch private equity firm Parcom.

The public opinion: HEMA forever

The restructuring highlighted that HEMA still is an iconic brand in the Netherlands. While substitutes for the company’s products are abundantly available at competing prices, many Dutch feel that HEMA is part of the country’s core public infrastructure. Like community football fields, or the internationally best-known Dutch collective good: our dikes. This warm HEMA feeling even led to a crowd funding initiative supported by Dutch labor party senator Ms. Mei Li Vos. The aim of the crowd-funders was to transform the retailer into a member run cooperative.

Corona, HEMA's friend or foe?

HEMA initiated its restructuring path amid the first wave of the pandemic. The impact of the pandemic in 2020 proved to be a EUR 32m drop in EBITDA[1]. A significant number, but moderate in relation to the company’s size and large cash buffers. Other retailers facing the same headwinds navigated through the storm. The Dutch government proved to be a warm friend by swiftly making available various generous liquidity support measures. HEMA for some reason decided to mow the lawn when it was raining. Why didn’t the company wait until visibility returned?

HEMA, a photo-based restructuring

HEMA opted to cease making interest payments on its bonds in June 2020 leading to, or being a prerequisite for, the various legal proceedings it embarked on. In the UK scheme of arrangement, valuations come into play. In that sense HEMA is what can be labelled a photo-based financial restructuring. A third party makes a point-in-time desktop valuation of a company. This value judgement determines who wins and who loses, it is there to substantiate the proposed restructuring package. Given the importance of this photo, the photographer must have a certain stature, so this is usually done be a large accountancy firm or investment bank.

HEMA’s polaroid showed a value lower than its nominal debt load. In restructuring jargon, the value broke into the senior.

Is leverage a matter of taste?

HEMA was considered overleveraged by many, including its own management. But when does a company have too much debt? To a large extent leverage is a matter of taste. For example, private equity owned companies tend to carry more debt than family owned businesses. Was HEMA overleveraged? Let us look at this. The chart below presents HEMA’s leverage in the past years. HEMA’s financial year ends in January, making the last 12 months (LTM) of Q4 2019 the last pre-pandemic reference point.

Source: HEMA financial reports and presentations, SERRA analysis

That number, 5.6x EBITDA, is on the high side but not out-of-line. In the current ultra-soft credit markets, plenty of European leverage loans are issued at these leverage levels and many even beyond that at 6-7x. EBITDA. Moreover, what was the leverage when the bonds were issued back in 2017? The number was nearly one tick higher at 6.5x..

Leverage and liquidity

Leverage stops to become a matter of taste when the debt can no longer be serviced. When there is insufficient cash to pay interest and scheduled repayments. Was that the case for HEMA? Not really, the company had plenty of cash when the pandemic arrived at the scene. Hema’s liquidity position was much better than usual. Moreover, the company had no upcoming scheduled repayments with its bonds maturing in October 2022 (SSN) and October 2023 (SN). There is little reason to presume that refinancing of these bonds through the issuance of new bonds would not have been feasible. Quite impressively, management convinced the court that HEMA was rapidly running out of cash even though there was ample liquidity.

Source: HEMA financial reports and presentations, SERRA analysis

Your debt, my debt, whose debt?

When the restructuring was announced and discussed in the media, one might have gotten the impression that the company was facing a large bond repayment obligation in June 2020. In fact, this bond repayment was not due by the company but by the company’s parent, its owner, named AMEH. Even if your parent goes by the name of your anagram, it does not mean you are responsible for its liabilities. To what extent did the payment default under the AMEH bond impact HEMA?

Do you find this an interesting topic?

SERRA is contemplating to organize a brief webinar on the HEMA restructuring case. Please let us know if you want to be invited and we will pick a date when there is sufficient interest.

[1] H1 2020 vs. H1 2019 results

Disclaimer

The views and opinions expressed in this article are SERRA’s only. SERRA may advise or may have advised HEMA creditors in the ordinary course of business. Financial data was taken from the company’s financial statements and company presentations.

SERRA has experience in advising in financial restructurings. Flexible engagement terms, large or small teams, senior advisors only. International DNA, multi-language, multi-cultural teams.

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See also www.serrapartners.nl/team to reach out.