Hornby secure £18 million loan

[Keep the Faith]

Just how much more money can this company burn through?  Do they have a dragon in the warehouse that needs daily feeding with gold?

 

These loans move PNC and Phoenix above unsecured creditors should the company go under.  I bet their suppliers are having fun securing credit insurance.

 

The arrangement fee for the PNC deal is £120k and the combined non-utilisation fees come to £150k - that's a lot of cash gone before they even borrow a penny.

[alfsboy]

They are  using it  to buy Gibson .

[34theletterbetweenB&D]

Looks like 'bet the farm' time. You don't set up to borrow like that on Hornby's scale of business casually. One way or the other that money will be used to buy 'something(s)' which the plan projects will "Rebuild the brands" and thus turn the business around. Purchasing a manufacturing facility in PRC? 

[Mike Storey]

Just how much more money can this company burn through?  Do they have a dragon in the warehouse that needs daily feeding with gold?

 

These loans move PNC and Phoenix above unsecured creditors should the company go under.  I bet their suppliers are having fun securing credit insurance.

 

The arrangement fee for the PNC deal is £120k and the combined non-utilisation fees come to £150k - that's a lot of cash gone before they even borrow a penny.

 

But expenditure is down and losses have been significantly reduced. It is revenue that needs to increase, and that will require further investment. These loan facilities (not loans as such) are perfectly normal practice for funding short term cash flow (5 years on the PNC line, I think in this case), and are backed in the normal way by debentures (for PNC). It is used to avoid further dilution of share values, as well as ensuring control of the company remains the same (unless default occurs). In other words, apart from ensuring the covenants of the deal are maintained, the finance company cannot try to direct the company away from its preferred strategy. The charges do not look out of the ordinary to me - we paid similar percentages when arranging a non-bank facility for our fledgling company in 2009/10 (banks were even more reluctant to fund start-ups then than they are now).

[jjb1970]

The down side is that this could potentially increase their debt if they use the credit facility to the max. The up side is that they are clearly still considered credit worthy enough to retain a credit facility of this type, and having it allows them to invest in product development and business improvement.

 

I tend to think that as others have said a few times that one of Hornby's principal problems is their apparent top heavy nature and listed company baggage in a market where more of the competition is from small lean, mean and flexible competitors. Some of whom are using concepts such as pre-ordering, direct sales with no retailer distribution and crowd funding to de-risk and manage cash flow/finance. Outsourcing manufacture removed a huge barrier to market entry.

 

The product quality Hornby has been delivering since they abandoned design clever has been first class and as good as any other supplier in the business but clearly they need to turn a profit at some point.

[jjb1970]

If I was the bank, I think the first thing that I would be looking for is for Hornby to concentrate on their key market - the UK. They simply do not seem to have picked up the ball at all with their European brands. Better to sell the brands off to a European company that will use them properly.

 

I'm not sure how Hornby International are doing profit wise these days, it was said that their operation in Spain which managed the international brands had become some sort of bottomless pit swallowing money a while ago when they really were at a low ebb and struggling with finding a factory that could make their product, struggling to supply stuff, design clever etc. However on the other hand their international brands can work to exceptionally high standards. They seem to concentrate on markets that are probably not the most lucrative in HO but within those markets they seem to be very highly regarded. I'm a big enthusiast of Italian HO and Rivarossi and Lima Expert Italian outline is superb. So I think there is a lot of potential in their international brands.

[The Stationmaster]

It is an interesting approach they have adopted.  Firstly they have got themselves out of involvement with the bank and all that would entail when it comes to any sort of loan, even as working capital - that is a clever move as it will relieve them of any worry about breaking banking covenants.

 

But on the other hand what they have done is secure the loans by debentures on Hornby PLC and Hornby Hobbies Ltd and PNC Business Credit is ultimately a US based company which in effect has an interest in assets returning their value either through meeting the loan terms or by debentures.  Phoenix has thus - I think - taken something of a risk to draw in capital but obviously thinks its own position is secure in view of the level of its shareholding, and now debt holding in Hornby PLC etc.

 

But what Hornby now has to do is make that money work because it will cost them even if they don't use all of it.  They clearly now have to respond vigorously to the market in order to retain market share and sales value and regrettably based on the form we have so far seen from then this year I do wonder about their ability to do that as their marketing seems to have rather lost its way and gone back to some of the ideas of yesterday rather than facing up to the competitive situation of today, certainly in the model railway world.  The PNC credit arrangement basically gives them 5 years to get it right and if they don't they'll be facing somebody potentially calling in debenture value which is senior secured, i.e that could mean them taking out a £12 milion chunk of Hornby assets if my understanding is correct.

 

Edit to correct spelling error

Edited June 6, 2018 by The Stationmaster

[Keep the Faith]

But expenditure is down and losses have been significantly reduced. It is revenue that needs to increase, and that will require further investment. These loan facilities (not loans as such) are perfectly normal practice for funding short term cash flow (5 years on the PNC line, I think in this case), and are backed in the normal way by debentures (for PNC). It is used to avoid further dilution of share values, as well as ensuring control of the company remains the same (unless default occurs). In other words, apart from ensuring the covenants of the deal are maintained, the finance company cannot try to direct the company away from its preferred strategy. The charges do not look out of the ordinary to me - we paid similar percentages when arranging a non-bank facility for our fledgling company in 2009/10 (banks were even more reluctant to fund start-ups then than they are now).

All true Mike but this is on top of an £8 million placing in July 2016 and another for £12 million in November 2017 both with the promise that it would put them on an even keel with the ability to invest for the future. Don’t forget the sale of the Margate site too. They are getting through money faster than Johnny Depp and Nicolas Cage.

 

If they start utilising these facilities then you’d want to see a pretty convincing plan that things are going to be different this time.

Edited June 6, 2018 by Keep the Faith

[stewartingram]

Looks like 'bet the farm' time. You don't set up to borrow like that on Hornby's scale of business casually. One way or the other that money will be used to buy 'something(s)' which the plan projects will "Rebuild the brands" and thus turn the business around. Purchasing a manufacturing facility in PRC? 

Or investing in Railtrack?

 

Stewart

[Phil Parker]

I think it's more a case that the current manufacturing scenario has made entering r-t-r model railways a far more realistic proposition for newcomers than used to be the case.

 

Prices are what they are and, without wishing to sound too Darwinist, production volumes will ultimately be set to cater for those willing and able to pay them. There's a big difference between the market becoming unsustainable and some existing participants not being able to keep up. At some point that might include me, depending on when and where things level off.

 

The problem for Hornby, and probably Bachmann, too (though for different reasons) is that "the others" are leaner, hungrier and more agile. Hornby's best hope for long-term survival (IMHO) lies in changing their corporate structure to better match the way the rest of the industry is evolving. As outsiders, that isn't a process we are likely to notice until it's done.

 

John

 

Not just "leaner, hungrier and more agile" but the newcomers aren't trying to produce a full range. Hornby is keen to allow you to build an entire layout with just their products. The newcomers aren't remotely interested in this, they just produce individual models to fill up your cupboard. Track? No. Bread'n'butter coaches? No. Scenic items? No.

 

This almost certainly makes good business sense. Many modern "modellers" simply want a new box, ideally containing a loco, in their paw - you see this on Facebook after any large show - and have only the vaguest intention of building a railway to run it on. Building a balanced collection doesn't matter. You can have locos that would never be seen with each other, it really doesn't matter.

 

Is it time for Hornby to take a long, hard look at the hobby today and not 50 years ago and concentrate on this?

[LBRJ]

Partly true, but it is the opposite way around: PNC lending up to £12m and Phoenix up to £6m.

 

Thanks for correcting my glaring error there!

 

Those numbers make much more sense in an  If you want to borrow X come up with Y yourselves arrangement.

[Silver Sidelines]

I think you must have rose tinted spectacles!

 

..The product quality Hornby has been delivering since they abandoned design clever has been first class and as good as any other supplier in the business..

 

I have seen no improvement - I have had two City of Bs - one of which was a replacement direct from Hornby a fortnight ago which came out of the box in four pieces and had a bent handrail to boot. 

 

Sorry I have had better service from one of their competitors.

 

Ray

Edited June 6, 2018 by Silver Sidelines

[woodenhead]

I think you must have rose tinted spectacles!

 

 

 

I have seen no improvement - I have had two City of Bs - one of which was a replacement direct from Hornby a fortnight ago which came out of the box in four pieces and had a bent handrail to boot. 

 

Sorry I have had better service from one of their competitors.

 

Ray

City of BS!!

 

I could read that two ways given the rest of the post and either sounds appropriate.

[jjb1970]

I think you must have rose tinted spectacles!

 

 

I have seen no improvement - I have had two City of Bs - one of which was a replacement direct from Hornby a fortnight ago which came out of the box in four pieces and had a bent handrail to boot. 

 

Sorry I have had better service from one of their competitors.

 

Ray

 

Rose tinted spectacles maybe, or maybe I've been lucky, or maybe you've been unlucky. As I noted on the thread started by Robmcg on models arriving damaged this is an entirely personal thing. I've very rarely had any issues with the condition of Hornby models when they arrive, and to be brutally honest it's not really my issue if others have been unlucky as I have confidence in them. Equally, I fully appreciate that if people receive a box of bits then whether or not most people are very happy is just as irrelevant to your own opinion.

 

If I look at their releases in recent years (and indeed their pre-design clever releases) they've been superb for the most part and at their best their market leading for OO IMO. The little Peckett is a true star, the air smoothed MN one of the best releases for many years IMO and the recent Princess Coronation is superb. If you don't agree then fair enough but I'm perfectly happy with these models and others I've bought and stand by my opinion that they're as good as any OO RTR.

[Legend]

Well I used to like my local model shop, but like others , I don’t have one anymore . Glasgow used to have 3 or 4 back in the late 70s then it was D and F , then it was none. Hornby were lambasted 2-3 years ago when they tried selling direct as well as through their dealer network. It really hacked off their retailers . But as Phil Parker ponders on whether they should make the full range of materials, I am now wondering if they were just 2 or 3 years ahead of their time and suffered for it. I was against it at the time,but now considering the way the market has already moved, I wonder if the only way for survival is selling direct? That way they have the retailers and their own margin to play with, which was no doubt the attraction at the time.

 

This week we’ve seen Model Rail commission 2 new locos, last month Hattons announced 30 new 66s they are selling direct . We have a crowdfunded APT at up to £1000 (I still can’t quite believe people will pay that much) Rails and TMC are commissioning own models as well as Kernow . There are others selling direct .

 

So the rest of the market has moved on. New models from Bachmann have slowed to a trickle. Maybe Hornbys current model selling through retailers is unsustainable . Maybe it’s time to think what was unthinkable . Sell direct , earn the extra margin as an essential way of keeping afloat.

 

And do something to ensure a consistent level of quality, no matter what factory produced it. The fun of opening a red box has been replaced by a sense of unease as to what you will find . Will it go or won’t it.

Edited June 6, 2018 by Legend

[Silver Sidelines]

For the record, the first City of Birmingham arrived minus its speedometer cable.  The replacement  direct from Hornby arrived with the front bogie detached.  The handrail on the tender was also bent.  I think half the trouble is that a lot of buyers of these expensive toys don't actually play with them but just keep them in boxes and are not up to spotting things that are wrong - until it is too late.

 

 

 

 

 

Edited June 6, 2018 by Silver Sidelines

[Silver Sidelines]

Briliant

 

Couldn't have put it better - and my wife agrees.

 

... The fun of opening a red box has been replaced by a sense of unease as to what you will find . Will it go or won’t it.

 

Regards

 

Ray

[Porcy Mane]

They are  using it  to buy Gibson .

 

Naaahhh. Yer stringing us along. Surely they can't be that far out of tune with reality. Looks like it may not be long before they have to face the music.

[Rivercider]

Not just "leaner, hungrier and more agile" but the newcomers aren't trying to produce a full range. Hornby is keen to allow you to build an entire layout with just their products. The newcomers aren't remotely interested in this, they just produce individual models to fill up your cupboard. Track? No. Bread'n'butter coaches? No. Scenic items? No.

 

This almost certainly makes good business sense. Many modern "modellers" simply want a new box, ideally containing a loco, in their paw - you see this on Facebook after any large show - and have only the vaguest intention of building a railway to run it on. Building a balanced collection doesn't matter. You can have locos that would never be seen with each other, it really doesn't matter.

 

Is it time for Hornby to take a long, hard look at the hobby today and not 50 years ago and concentrate on this?

Of course if Bachmann and Hornby did copy the new business model, and ditch the full range to concentrate on specialist/flagship models,

without any supporting track and infrastructure, they might become leaner and fitter, but then how long would the hobby as we know it survive?

OK there would still be collectors who never open the box, and modellers who build their own track and wagon kits, who will buy new models.

But without the Nellie/Thomas style starter sets, where a complete train set can be bought off the shelf, where are the modellers of tomorrow likely to come from? 

 

cheers 

[34theletterbetweenB&D]

...the newcomers aren't trying to produce a full range...Is it time for Hornby to take a long, hard look at the hobby today and not 50 years ago and concentrate on this?

 Slow inching away from 'the trainset' over the past decade, and the recent TTTE exit announcement, are moves in the right direction, but not nearly swift or large enough is my gut feeling (This may well also apply to their other product lines of which I know nothing). This because like jjb1970, the new introductions I purchase from their range meet expectation - I wouldn't buy otherwise - and Hornby appear to be sustaining a steady stream of such good new introductions, judging by the enthusiast chunterings here relating to the product that doesn't interest me. So what are the underperforming products that are dragging the ship down?

[plarailfan]

Sadly, I'm not optimistic that this will have a happy ending.

The economy is not particularly buoyant and working in retailing myself, I don't manage to go to many exhibitions, but some (admittedly, not all) of the ones I have visited recently have been poorly attended compared to previous years. Traders were complaining bitterly about the poor turnout at one recent show !

Petrol keeps nudging up, the suggested tax increase to help out the NHS will impact the disposable income for many people, while many modellers are running out of patience with the expense of the hobby and probably, by and large, are happy to make do with the layout and model collection, that they already have.

While new releases of models are still selling, they are often special editions and sadly, the days of churning out thousands of MK1's every year and selling them quickly, at more or less the rate of production, are long gone....

While waiting for the loco to along so I could take this photo, a group of adults and young children came along and I volunteered to them "there's a steam train coming in a minute" thinking the kids, at least, would be pleased, but, sadly, none of them were bothered for hanging around and after a few seconds they moved on and missed it. https://www.flickr.com/photos/41294071@N02/28375792118/in/dateposted-public/

I think Hornby probably need to shrink the range, down to a core, budget priced, selection of mass produced, popular models for the railroad range and a few "premium" specials for collectors and modellers with a more generous disposable income. Maybe they could re-hash some of the older and smaller models and package them in budget price sets for sale at preservation centres and heritage lines. Even mixing small continental locomotives with British outline carriages and advertising ("Kit Kat" style) wagons could be an option, for a bit of humour.

[Phil Parker]

Of course if Bachmann and Hornby did copy the new business model, and ditch the full range to concentrate on specialist/flagship models,

without any supporting track and infrastructure, they might become leaner and fitter, but then how long would the hobby as we know it survive?

OK there would still be collectors who never open the box, and modellers who build their own track and wagon kits, who will buy new models.

But without the Nellie/Thomas style starter sets, where a complete train set can be bought off the shelf, where are the modellers of tomorrow likely to come from? 

 

cheers

 

Perfectly true, but to many, does this matter? Modellers have deserted the local model shop in the pursuit of slightly cheaper prices. In the short term, this works, but now all their models come by post and we see the gripes about bits falling off in transit.

 

Financiers care nothing for the long term. If making "lollipop locos" works (it has for Heljan) then they might decide this is the way to go. After this, direct selling might appeal too.

 

The job is to make a profit, NOT to ensure the survival of the hobby.

[Clearwater]

But expenditure is down and losses have been significantly reduced. It is revenue that needs to increase, and that will require further investment. These loan facilities (not loans as such) are perfectly normal practice for funding short term cash flow (5 years on the PNC line, I think in this case), and are backed in the normal way by debentures (for PNC). It is used to avoid further dilution of share values, as well as ensuring control of the company remains the same (unless default occurs). In other words, apart from ensuring the covenants of the deal are maintained, the finance company cannot try to direct the company away from its preferred strategy. The charges do not look out of the ordinary to me - we paid similar percentages when arranging a non-bank facility for our fledgling company in 2009/10 (banks were even more reluctant to fund start-ups then than they are now).

I think the rates look remarkably attractive for a small, definitely not investment grade borrower who has run out of cash sufficiently to have to do two rights issues in consecutive years... The non-utilisation fee, sometimes called a commitment fee, is standard practice. Effectively the bank has to reserve capital for a borrower whether the loan is drawn or not. (Effectively this is a £12m overdraft facility so the borrowed amount will move up and down).

 

Two things I note from the release. Firstly the PNC loan is secured on the shares and the assets of the company. That's normal but I somehow doubt that PNC will behave in quite the same relationship way that the UK clearer Barclays has towards Hornby. If there is further financial trouble, it would not surprise me if they actually enforced. Secondly, the Phoenix loan is subordinated. I wouldn't expect that to be drawn except if there is financial difficulty - ie there would be a draw stop on a credit event under the PNC loan. Therefore, any cash drawn on the Phoenix loan could potentially reduce PNC's exposure to Hornby. A neat structure.

 

Interesting that they're borrowing from PNC. I'd flatter myself that I'm reasonably conversant with the banking sector. I've never heard of PNC - they appear to be a regional US bank. A surprising outfit to be the sole senior lender to a small UK plc. I'd have thought that there would be a number of other institutions that would have been approached ahead of these which suggests that the usual suspects of lenders to UK companies may have had issues believing the credit story. I may be wrong and there is an underlying logic of which I'm unaware.

[mdvle]

Of course if Bachmann and Hornby did copy the new business model, and ditch the full range to concentrate on specialist/flagship models,

without any supporting track and infrastructure, they might become leaner and fitter, but then how long would the hobby as we know it survive?

OK there would still be collectors who never open the box, and modellers who build their own track and wagon kits, who will buy new models.

Or Peco, who appears to have made quite a successful business selling track.

 

The key point is that if there is an opportunity somebody will create a business to fill the need, so instead of people buying everything from Hornby they will deal with several companies/individuals.

 

Now admittedly it won't be the hobby as you know if, if your definition of the hobby starts and ends with Hornby, but the hobby will survive precisely because it isn't remaining stagnant but instead is evolving to reflect how the outside world is changing.

 

But without the Nellie/Thomas style starter sets, where a complete train set can be bought off the shelf, where are the modellers of tomorrow likely to come from?

Hate to break it to you, but that tradition is already dead.

 

Again though, things change.  As a podcaster says, people see model trains on YouTube, think that's neat, and get into the hobby that way.  Or maybe through Facebook, Twitter, or any number of other ways.

 

[Silver Sidelines]

Rather simplistic I think

 

...... but now all their models come by post and we see the gripes about bits falling off in transit.

....

 

 

 

As I have already said the speedometer cable was missing - nothing to do with damage in transit - never there!

 

 

Likewise the water scoop on Duchess of Hamilton (Hornby from Locomotion)

 

 

And then what about these buffers on Llanvair Grange - bent in the Post - I think not.

Edited June 6, 2018 by Silver Sidelines