The Royal Bank of Scotland boss responsible for deciding the fate of the most financially stretched companies in Britain has insisted the bank did the right thing by stopping HMV tipping over into bankruptcy for almost two years – before finally pulling the plug this month.
Derek Sach said he gave the store a fighting chance, but it had to be put into administration. HMV was never a zombie company, kept going in spite of unsustainable indebtedness, he said.
RBS dominates lending to small and medium-sized businesses and is under fire over lending policies that many businesses say are adding to the UK's economic woes. The bank, 83% owned by the government, is accused of maintaining loans to companies that in past recessions would have gone bust, at the expense of lending for investment or to new ventures.
Sach defended what he called the bank's "enlightened approach" to troubled companies – claiming this attitude had helped keep UK unemployment levels in check through one of the most sustained periods of stagnation.
In a wide-ranging interview, Sach also hit back at Bank of England accusations that big banks were failing to reflect the true state of weak loans on their balance sheets. "It's a point of view," he said. "But I personally don't think it should be top of the agenda for bringing about a recovery in the world."
One of Britain's most experienced distressed debt bankers, Sach has in recent years overseen the financial restructuring and sale of luggage maker Samsonite and care homes group Four Seasons Healthcare – the latter sold last year to Guy Hands' private equity group, Terra Firma. Corporate crises in which he played a pivotal role in the past 12 months included the administration of high-street chains Clinton Cards and Peacocks. RBS also took the lead in resolving a refinancing crisis of Thomas Cook at the end of 2011.
Last year saw Sach's sector, known as RBS Global Restructuring Group, again throw a refinancing lifeline to Premier Foods. GRG also elected to take co-ownership of motorway maintenance group Mouchel, which employs 8,000 people, through pre-packaged administration.
But there has been no such enthusiasm for continued RBS involvement in HMV. Last week Sach sold out to Hilco, a specialist turnaround investor, for an undisclosed amount. The distressed debt sale is likely to leave the taxpayer-controlled bank recovering only a small part of the face value of loans to HMV.
Together with fellow lead lender Lloyds, RBS had breathed life back into the dying DVD to computer games retailer more than three times in two years, waiving loan covenants and softening borrowing terms. A similar pattern of forbearance was shown to Clinton Cards before its failure last May. Such lifelines thrown to ailing companies have been nicknamed "extend and pretend" loan agreements by critics.
"HMV is an example of a business challenged by both structural and cyclical factors," said Sach. "The lenders' support over the last two years was designed to provide time for management's strategy to reposition the business to develop."
A central plank of HMV's strategy had been to combat plunging DVD and CD sales by selling fashionably large headphones and other technology accessories – a plan viewed with scepticism by many City analysts.
"We do not believe that the move, more aggressively, into portable digital technology will be strong enough to drive footfall and earnings," Freddie George at Seymour Pierce said as long ago as September 2011. "We maintain our 'sell' recommendation as we continue to believe that the business is a value trap and management will struggle to grow profitability."
Three months earlier, HMV's then chief executive, Simon Fox, was even more candid. He said the business had some way to go before it had a "full, credible equity" story for shareholders – a message he stuck to until he quit last September.
Sach accepts HMV's strategy failed but insists good use was made of the time bought by the banks' supportive approach, with non-core divisions within HMV Group sold off in an orderly fashion. Even the failed rump may yet return some value for creditors if administrators can find a buyer in Hilco or another investor.
But time is not always on the bank's side. Regulators are growing impatient that some of Britain's largest lenders appear to be failing to conduct realistic valuations of their loans. Such criticisms were set out in stark terms two months ago, in the Bank of England's six-monthly Financial Stability Report.
Afterwards, deputy governor Paul Tucker said: "Banks [have to] have honest balance sheets… This is a major issue for all top bankers; they have to look at their loan books and say: 'Well, what actually do we think the rate of recovery is going to be?'"
Sach defended RBS valuations. "We follow all the rules… and we make provisions when we should, when we know, or think, there's an asset impaired. I would contend we're adequately provided."
He believes that behind talk of so-called zombie companies there is little appetite for imposing "violent" insolvencies as was the case in the 1990s. "And in a funny sort of way it would be awfully perverse to do that now – now that we've struggled for five years with this 'letting the air out of the balloon slowly' economic recovery. To suddenly say: 'We'll have a great recession and move forwards…' I don't think it's going to happen," he said.
Sach admits the length of the economic downturn has surprised him, but he remains confident a recovery will come. "When we were restructuring these things in 2009 and 2010 everybody anticipated that, by now, the economy would be better than it is… and it just hasn't happened. Now possibly people are veering too far the other way and assuming it will never get any better."
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