Better Capital, a fund known for acquiring distressed businesses, purchased Jaeger’s secured debt and acquired a 90% equity stake in the company back in 2012, but failed to turn it around. Reports suggest that Jaeger had alienated its core customer base (those aged 45 to 54) by focusing on younger age groups and diluted the brand by offering regular discount sales. These struggles are not limited to the likes of Jaeger: challenging market conditions have resulted in in-store UK retail sales decreasing by 1% on a like-for-like basis since March 2016.
Better Capital confirmed earlier this month that it had on-sold the secured debt to a buyer believed to be Edinburgh Woollen Mill. Now that Jaeger has entered administration, it is expected that Edinburgh Woollen Mill will acquire the brand and some of the assets through a new vehicle in what is known as a “loan to own” strategy.
This strategy is an attractive option for the right buyer – buying secured debt as opposed to equity affords the buyer the ability to control the company (including by placing it into administration) without also being responsible for all of the unsecured liabilities - after all, in distressed situations, creditors (rather than shareholders) sit in the driving seat. As a result, the ability to transfer debt is a key provision in any loan agreement. This usually creates a tension as lenders like the freedom to on-sell the debt to whomever they want, whereas borrowers want to restrict the lenders’ ability to transfer to organisations known for aggressively enforcing the debt. This therefore typically leads to heavily negotiated blacklists (i.e. who a lender may not sell the debt to) and whitelists (i.e. who the lender may sell the debt to), although the requirement to adhere to these lists usually falls away when the loan agreement is in default.
Edinburgh Woollen Mill has form here, having acquired parts of Jane Norman, Peacocks and Austin Reed in similar circumstances; and the loan to own strategy has been deployed in other high profile restructurings, e.g. Hilco’s purchase of HMV’s debt from Lloyds and RBS in 2013 and Better Capital’s purchase of iNTERTAIN (the owner of Walkabout bars) in 2014. No wonder the phrase “the changing face of the High Street” is being coined so often.
Strategy aside, it should not be overlooked that any kind of acquisition of a distressed business will result in brands and indeed jobs being preserved.