Clearwater

Agreed - depends on the change of control language in the legal agreement. I'd not want to lose control of "my" product however I doubt it captures a change of control of Hornby as a whole

 

David

Agreed Ron - I'm sure would take Bachmann all of 5 nano seconds to extend their license to the uk and export their existing, tooled product to the uk as well...

 

Question is what would they pay Hornby/adminstrators for that licence assuming Hornby has not defaulted on the agreement. If I were h, I might look to sell that licence in the next couple of months

 

David

Not sure how UK banks work but interesting comments on some legal sites about breach of financial covenant – to paraphrase:- one site (US) Banks do not like calling in the debt if there is in their view an underlying profitable business, because "Ongoing businesses can be a revenue source for banks even when the loan has developed problems. Besides, banks must set aside reserves for loans they classify as being in default, and they don't like to do that since capital tied up in reserves is capital that can't be put to work earning money for the bank in the form of loans to other borrowers”. In banking I believe an owed good debt is actually an asset and I can see that as applicable in UK as well particularly when the economy is on the up. The big question is, is the business profitable, and do Barclays want to be the bank that shot “Thomas" for less than they hand out in compensation possibly every week (you can see the headlines already!!).

All banks work in exactly the same way... Yes, a loan is an asset to a bank and, as I commented earlier, banks set covenants so as to be able to intervene whilst the company in question is still profitable and, hopefully, worth more than the loan outstanding

 

I'm sorry but Barclays will not analyse the situation from a PR perspective. The consideration about "who shot Thomas" is not an argument that will be made with any relevance. How can you explain that to your shareholders? The compensation argument is also irrelevant.

 

Barclays loan to Hornby is a tiny, tiny fraction of its loan book. By comparison Barclays will lend hundreds of millions to single FtSe 25 companies. When a loan defaults, the loan is typically transferred to a specialist recovery group. Those guys will be very hard nosed about retrieval of the cash. I'm afraid pr rarely features on their radar. Not Barclays, but you may recall a few years ago HBOS pulled a loan on Farepak just before Christmas leaving lots of people out of pocket. Got dire PR. Didn't stop them. I very much doubt whether Hornby will get any special treatment as the franchise holder for 00 Thomas...

 

David

That's an impressively rapid delivery....

My personal preference is also for 70-footers.  On major routes these vehicles could account for 50% of the express traffic.  In many ways 70-footers are a better match for the new Kings than the 57-footers.

 

The GW was notorious for its non-uniform rakes.  To get a flavour of express services, I think the minimum you need are 2 styles of 57-footers (I would suggest Toplights in addition to the new Hornbys) and 2 styles of 70-footers (I would suggest Dreadnoughts and South Wales types).

 

So, that's 4 sets of coaches, and that, I fear, makes  the likelihood remote [sigh].

All of which is why I've bitten the bullet and decided to learn to build etched brass coach kits. Hopefully though the rtr market will help out with some of the variety!

 

David

It occurs to me that I can show this now.

tandem.jpg

The real thing, from a slightly different angle. The tandem is set for the B1 on the right, which I presume has reversed from the Up main. Deltic, and annoyed driver, held at signals. Photo copy right of Andrew C ingram.

But happy trainspotters - did they bribe the signal man to ensure they got a deltic start up right next to them?

 

David

Funnily enough I work in the public sector too............

 

Possibly, but I disagree. Having run my own web business that imported, retailed and distrubuted products I have some idea. As a Luddite and having run and successfully outsourced my logistics operation (from inbound to despatch), the fact that it is on 3 continents and multiple channels and several factories does not in itself require fancy IT. You only need the fancy IT when you have a business need for high levels of effective interfacing between those elements, often based on timing or complexity or risk. Well trained staff with clipboards, spreadsheets and email can fulfil the same function for next to nothing in a normal warehouse. There is nothing invalid about my analysis since nothing you have suggested provides any justification for a complex, risky and expensive IT system since Hornby do nothing in their business which is properly high risk, complex or time critical AFAIK. There core UK operations are the design, sales & marketing, plus box shifting in the warehouse. The lead times are huge and key elements of their supply chain are sufficiently fluid as to make timings very flexible.

 

I'm more than happy to be proved wrong, that Hornby do have a degree of criticality on their business operations that justifies the risk and cost of this system (which still doesn't work), but I can't see it. Where is the added business value and ultimately extra profit it will generate? Does saving a day or two in the production to retail shelf process generate sufficiently enhanced profits to pay for such a system? Not selling model trains it doesn't.

 

When their production processes were fully sorted, when their direct sales route was operating properly and profitably, when they actually had some idea what their stock levels were (which does not require any IT at all), then perhaps look at some system, but before that you are diverting business finance and resource away from the core activity of flogging trains, kits and paints to punters at decent margins. This is one of the fundamental problems with ERP implementation, it takes management's eyes off the ball. Hornby sells models. It's focus should entirely be on that, and as we've seen with even the basic operation of the website, they have lost focus on that. ERP will never overcome poor strategy, botched marketing or a less than ideal supply chain. Remember the bulk of Hornby's sales (70 odd %) are in the UK. That's less than 30% everywhere else. And over 70% of overall sales are trains, so as I've pointed out before the core business of Hornby, the driver of revenue (and presumably profit but we don't have figures) is selling model trains in the UK. Everything else is peripheral, so investing in some expensive IT system to help you sell stuff in the US or FRance is arguably nuts, since it is a tiny and probably not very profitable area of the business. The UK design, marketing and box shifting doesn't require it. Overseas was seen as a 'growth' area, but again my argument is you put in the fancy system when your core business is stablised and producing the cash to fund it, and/or the growth areas are actually growing sufficiently to justify the resource. Not before, and drain the business of cash and management time trying to get it to work.

 

How many City analysts have actually run a logistics operation or a business? They know no more about Hornby's operations or how to improve them than my cat does. In fact most of them can't even run a bank (not actually difficult) or count, as we all found out in 2008. Didn't see many of the complaining about Ames' strategy a couple of years ago, yet here we are with £1m stock loss, growing financial losses etc.

Where do you get your 70% figure relating to trains? In my view, H provides insufficient disclosure in their accounts to work out profitability of individual lines. Hence the comments in this thread saying "we don't know what the problem is"

 

On the city analyst point, I think you are conflating several separate points and issues.

 

Firstly, Hornby Plc is an absolutely micro stock. From memory, the FtSe 100 will all have market capitalisations of over £2bn. The big stocks, which attract the most coverage from analyst, will be over £10bn. At c 50-100m Hornby simply isn't going to be on analysts' radar.

 

A good analyst will know a huge amount about their coverage sector. If they don't, they won't survive. A top analyst will spend their time with CEOs and CFOs and with large scale investors. If they don't know their sector in enough depth to be able to talk and convey the equity story they would be found out very quickly and would be fired. their job as analysts is to help investors value the stock. They will need to know enough to ask pertinent questions of management and that may well include questioning how the supply and logistics chain is managed. They may then write investment reports critical or supportive of management. However to write that repot, you need to understand the business.

 

To then blame those city analysts for the management of banks' is as analogous to blaming Hornby's product development team for other aspects of that business's failings. The city analyst's job is to understand and report on stocks in a given sector, not manage that bank.

 

Whatever the business, public or private, managing an entity with turnover of multi billions and hundreds and thousands of staff globally is not an easy task. To suggest otherwise is overly simplistic

 

David

Is it my imagination or are the boiler handrail knobs on the B12 horizontal...

Don't worry, it's the EP. Things can change to the final model

Wow! Did anyone else see hints of a new easy fit decoder? One which does not require you to remove the tender body.

 

EasyFitDecoder.jpg

I note they have so many 71000s they use them as test beds...

I like the complete chutzpah/lack of irony trumpeting the imminent release of a 70yr anniversary tie in of the end of ww2 just the 6 or so months late.

 

Now given demob happening in phases over 45-47 or so, perhaps they are right for the 70th but that feels like accident and not design! If I were them, I'd stop doing time dated products given the supply chain issues...

 

David

Where is every body?  Are you all over in Wright Writes watching the Wheel Wars escalate?

 

Presumably each wheel adherent will take the opposing view on type of track!

Thanks Richard - more of my experience has been with private ly held companies where share charges are common. A quick check on companies house shows some property charges and fixed and floating charges over the business.

 

David

Tol.

 

My other "gripe" is the lack of published (on-line) details from some kit makers.  Today I contacted a kit maker and asked if they had PDFs of the instruction manuals for a kit I will likely buy later this year.  I offered to pay a small "advance" deductible from a final purchase decision.  Within minutes I got a very satisfactory reply with about 10MB of PDFs.  No charge expected.  I can now make a detailed assessment of whether or not the highly detailed specification is within my capability.  I think I will be able to manage the kit and one of the reasons I have this confidence is that the PDFs include photos of every casting (all brass) included in the kit and the written instructions have numerous photos and 3D CAD drawings to guide assembly.

I think that's a great point. Usual disclaimers about no connection etc,but browsing the brassmasters site offers a good example. One of my gripes as someone starting out in kits is that you need to buy other parts separately. Not knowing what to get can be off putting. On some of their pages on the ex- Martin finney kits, there's the ability to download instructions, pictures of the etches, suggestions on wheels and motors etc. Now I fully appreciate most kit manufacturers are small outfits wand web design may not be their forte and I wouldn't want to distract them but useful to see what can be achieved. I would say that most manufacturers I've asked queries have usually been most responsive in providing information

 

David

Clearwater

"The bank will hold a charge over the shares (assuming it is secured)."

So, for practical purposes the bank does hold the equity.

In the unlikely event that you ever feel need for a tutorial in high current circuit breaker design, or the management of power distribution projects, you need only say so.

Kevin

Thanks! I may hold you to that. Whilst I don't work in a bank at present, I have financed a couple of power distribution companies....

 

I'm slightly over my skis answering that question, but I'd say the bank doesn't legally own the shares until they exercise the charge, they can only exercise if the borrower is in breach of the loan agreement and that breach cross defaults the security agreement. Technically they probably don't own them. To actually exercise is a final and irrevocable step so won't be taken lightly. However the threat being there creates the leverage in the negotiations

 

David

Clearwater

Excellent tutorial, many thanks.

The pound of flesh technique in action, really.

Next question: what practical value does "equity value" have to the bank, unless the bank holds it?

Kevin

If Enterprise value, the discounted value of the pre financing cash flows, is greater than the value of loans outstanding the business has equity value. Using the house analogy, when the mortgage is more than its value, we'd call it negative equity. Same here, same incentivise as if you can't keep up on your mortgage repayments.

 

The bank will hold a charge over the shares (assuming it is secured). Therefore, unless the equity owners resolve the situation to the bank's satisfaction, they can exercise their charge and sell the business themselves. So long as equity value is greater than the costs of solving the problem, they or someone else should do so.

 

If the loan is unsecured, calling the loan creates an insolvency event. Equity will be the last party to get paid from the liquidation proceeds so again if equity thinks there is value they are better controlling the situation by stumping up cash.

 

As others have noted, the equity is not widely held. I'd have thought either direct with management and/or via the corporate broker they are discussing the plan to satisfy the banks. It's no use management saying they can equity without knowing they can do it. Given the stock is traded, this may mean they need to sign up to be insiders and face restrictions on their trading

 

Ultimately the equity value to,the bank is that there are parties incentivised to ensure the bank gets all it's money back as there are others who will lose more.

 

David

Haverfordwest is west of Haverford...  unless you travel by GWR, in which case it's nowhere near.

Did the gwr train ryanair's staff then?

Clearwater

" Barclays won't want to make a bad situation worse"

Why? I'm struggling to see why they should care.

And, please excuse me using you as a tutor in my "teach yourself merchant banking in a week" course.

Kevin

No problem Kevin! Please note my comments are generic and not specific to Hornby or Barclays and some of my specifics may be slightly incorrect however the generality should hold/. I'm also from the practical side of banking as opposed to academia so some of my theoretical knowledge is high level.

 

Barclays has made a loan of, for sake of argument, of £10m. That loan has a fixed term, to 2019 if memory serves, and is more akin to a glorified overdraft than a mortgage. In banking terms, the loan "revolves" and can be drawn and repaid at any time within the term of the loan. Under a mortgage, usually; once borrowered you repay the loan over time. Normally, the bank will allocate some of its own capital against the loan it has advanced. The regulators, and markets including rating agencies, will monitor how may capital tre bank is holding against its loan book. (Don't forget that for a bank a loan is an asset). Typically banks capital is a fraction of the loans extended. Loans will typically have margins of up to 3-5%. Higher risk borrowers attract higher margins. If we have a 10 loans all of 100m each at 2%, we expect to make profit, pre the banks own funding and operating costs, of 20m. If one loan decision is wrong, the full loss would drawf the profits. However, if the bank can recover the loan at 80p in the pound, overall the bank would make no loss. Excuse the simple numbers to illustrate the point -in reality a bank has thousands of loans and other revenue sources, eg fees. Bank capitalisation rules and how loan capital is allocated is a massive topic in its own right.

 

When a bank advances a loan, it usually sets up an early warning system to allow it to intervene before there is no value in the company. This is usually a financial covenant package. Typically bankers look at interest cover (ie ability to keep making interest payments! And leverage - debt to value. (Like on a domestic mortgage with loanto value). Lending against value doesn't work for listed stocks - neither party can manage the share price, so the calculation tends to be debt divided by ebitda. In the back of the bankers mind is the fundamental value of the company. That is typically 6-10d ebitda. There are exceptions in either direction. If the convenant is set at 3x debt to ebitda, theorietixally the bank can step in whilst the value of the business still has a healthy cushion to the loan outstanding.

 

The banker will be thinking how do I get my loan repaid. They will be well aware that no other bank is likely to step in and provide capital. Of course if mgmt can find someone to step into the loan position then Barclays would be delighted. Mgt are incentivised to find such a party. So are any third parties who might wish to mount a bid for all or part of the business.

 

However, if the bank calls the loan, in a fire sale, full value is, in all probability, unlikely to be received. However, if a viable plan to either manage the decline more slowly, sell bits from a going concern etc increases the chances of one of the other events happening. However, if there is no plan showing better than, say, a60% recovery of the loan, then liqudation may be better.

 

My feeling here is that there is some value in Hornby, the shares show a value way in excess of the loan and probably price in a future capital raise. Therefore pulling the loan can only force Hornby either to not make payments to suppliers (bad for cash flow and trading), sell profitable businesses below full market value or sell stock below cost which increases losses. I don't see how that's in the banks interest when there appears to be equity value. I think they'll put the new mgmt team on a tight lease and monitor carefully.

 

David

Kevin

 

Q1 - B. Barclays won't want to make a bad situation worse although the interest margin will massively increase as will the covenant package. They may ask for disposals to aid pay down on the loan. But the bankers will recognise that pulling the working cap line is tantamount to closing them given the cash outflow to China being ahead of the receipts from customers

 

Q2 -A,. If the bank who knows you best and has lent to you for 15+ years walks away, why would anyone else step in? What do they know that you don't? Etc

 

Both answers prefaced with caveat that we don't have the info here to analyse

 

Richard E

 

Re out/ calls, I agree that's an effective trading strategy but given the lack of liquidity generally in H's stock and the massive volatility seen, would anyone write you an option at an efficient price to trade? Not my field but I'm sceptical

 

David

 

 

 

Hmm, how about this scenario: As a City Institution  hold  shares in XYZ Co at £ 1 and hold a million,  they agree to  sell XYZ x 1 million  block for £1m, then spread doom and gloom about XYZ , shares fall to 50p, buy back XYZ shares at 50p,  RESULT: they still have the shares which will rise back to £1 and therefore £1m , they keep the £500k  leeched  plus two lots of commission on the transaction,   best fact of this , they  did not actually SELL the shares in real money,  only AGREEING to sell,  (real  money never changed hands).  Leeches,Leeches Leeches!

 

The FCA would likely investigate the scenario you describe. Basically, that's market abuse and carries some pretty hefty penalties. When I was in banking, we had pretty frequent training courses on that sort of thing. Spreading false rumours to cause a price crash would fall into that category

 

David

I'm not up-to-speed with where we are in the trading/settlements calendar. But entirely possible that they have "sold" at a profit without even paying out for any shares.

 

That is (IMHO) what is wrong with the Stock Market. There are artificial incentives to trade which don't take proper account of the business' situation.

Quite possibly - beyond my knowledge I'm afraid!

 

I don't agree with you second statement though. It's a market. Whether they are able to close out a trade without ever paying for the shares is irrelevant. It's the same as a speed bet. Hornby got the cash long ago from the share issue so not their issue per se.

 

The investment fund has a made a decision to buy. They have to have the capital to pay for the shares they have brought. The trade has used both their financial and intellectual capital. They've worked out what the stock should be worth, taken advantage of some panic selling and made a profit. Fair enough to get paid for that.

 

David

The stock price represents a variety of things depending on your perspective. Corporate finance theory suggests it is the net present value of future dividends net of cash injection/ etc how ever it also reflects supply and demand in the market. If you are a fundamental investor, you'll buy when below your view on value and vice versa. However, with the share price cash some traders will have thought "this stock is oversold; I'll buy now and sell if it recovers by say 10p". However to do that trade, you still need to have a view on valuation above the trading price low. I suspect the current smallish fall is as a result of people who brought at c20p cashing out. Nice little profit if you did that, congratulations!

 

David

Another source of traffic on the branch post war was sugar beet.Anyone know what type of wagons were used for this freight.

I'm no expert here but given it was just post war and there hadn't been much investment, the wagon must have been past their best and a bit beeten up...

 

Sorry, hat coat gone

 

David

Reading "inside the railway room" in RM suggests that there are a fair few wives who buy a set for retiring husband who then expands collection. Again a shop perspective would be helpful but I'm sure wives will go for a brand they've heard of, eg Hornby, and a sub brand they've also heard of such as flying Scotsman or Pullman coaches

 

David

Not until they've done some GWR non-corridor stock 

You've added a sunshine emoji / emocotion or whatever they're called

 

Wasn't sunshine stock corridor stock