Banks Impose Diet On Retail Food Group

By Glenn Dyer | More Articles by Glenn Dyer

Trading in the shares of embattled fast food group, Retail Food Group (RFG) resumes today after the company’s four day trading halt and suspension last week that ended up in a welter of losses and bad news being delivered on Friday, including the suspension of the interim dividend.

RFG shares were trading at $2.04 (down more than 4%) last Tuesday when the company asked for a trading halt because auditors had not yet signed off on the company’s half year accounts.

RFG said the auditors probably wouldn’t be able to sign the accounts until Friday, meaning it would miss the February 28 (last Wednesday) deadline of the ASX for December balancing companies to report.

That saw the shares suspended, as threatened by the ASX and after the half year accounts were filed on Friday, containing losses, write downs and news of toughened supervision by its banks, the ASX said the suspension would lifted this morning and trading will resume.

That is likely to see the shares slump as investors catch up with the general sell off in the past three days, and the bad news in the half year report.

RFG, which owns a number of chains including Donut King, Gloria Jean’s, Michele’s Patisserie, Crust Pizzas, Pizza Capers and Brumby’s Bakeries will shut between 160 and 200 stores following a $138 million write down on the value of its franchises.

The write down saw RFG reporting a net loss of $87.8 million for the December half year

Releasing its delayed accounts on Friday morning (they were originally due last Thursday week), the company assured the market it was not in breach of any of its debt covenants set on Friday.

But RFG’s bankers – Westpac and the National Australia Bank – imposed a series of new measures on the company on Friday morning, including lifting its debt to earnings ratio to 3 times from 2.5 times previously — and in the process suggesting that if that limit hadn’t been increased the company could have been in breach of its borrowing covenant, or it will breach the old covenant in the months ahead.

RFG is now effectively in the hands of its banks who have insisted on the $260 million debt be cut, with 60%-net proceeds of any asset disposal (unless agreed) to be applied to paying down that debt.

RFG has suspended dividends for the half to support its balance sheet. Based on last year’s interim of 14.75 cents a share, that will save the company just on $27 million.

But it is hard to see the company being allowed by its banks to contemplate a final payout for the year. Last year that was 15 cents a share, meaning a saving of $27.4 million and more than $54 million for the 2017-18 financial year.

The results show just how much trouble RFG has been in with its lenders from Westpac and National Australia Bank.

As of Friday, the two banks now have imposed new benchmarks – RFG now has a budget of $90 million in underlying full-year 2019 earnings before interest, tax, depreciation and amortisation EBITDA).

Seeing EBITDA was $123.5 million in 2016-17, the company is looking earning less than that by the end of the 2018-19 financial year, or 15 months away. There was no estimate for the figure for the current financial year.

RFG’s loss before interest and tax was $106.9 million for the six months to December on a 21% rise in revenue to $195.5 million. RFG’s financial position will be monitored and examined by its bankers on a quarterly basis.

Part of the impairments include a $45 million writedown on the value of Michel’s Patisserie chain, and a $34.5 millon charge on its retail coffee division, which includes Gloria Jean’s and Cafe2U mobile networks.

The company also booked a $4.5 million writedown on the value of its Pizza Capers chain.

A further $35.7 million in charges have been booked as a result of the planned store closure program.

RFG has 1545 domestic stores, meaning the closures account for 13% of its total network. it is another headache for shopping mall owners where Donut King in particular is a key tenant in food courts.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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