CN reported today how Lakesmere’s administrator has set out the extent of the collapsed firm’s debts, revealing that its trade creditors have “no prospect” of recouping the £26m they are owed.
Deloitte’s statement of proposals also shed new light on the factors that drove first Lakesmere and then its subsidiary McMullen Facades into administration.
MBO: Beginning of the end
Lakesmere’s problems began following its management buyout at the end of 2015, Deloitte’s report states.
The MBO, which was launched by six senior executives and saw founder Mark Davey move from chief executive to chairman, saddled the specialist with “significant additional debt”.
At the time, Mr Davey said: “We continue to grow in a careful and controlled manner and the business is and will continue to be in safe hands.”
The buyout and the resulting restructure were followed by “a decline in performance as a result of a number of poorly performing contracts which needed to be funded”, the Deloitte report adds.
Problem jobs start to bite
With under-performing contracts causing problems, Deloitte reveals that “an additional cash requirement was identified” some time in 2016 – a requirement serious enough to prompt one of Lakesmere’s shareholders to inject £2m of unsecured funding into the company to help plug the hole left by the problem jobs.
Among these challenging contracts were a number managed by Lakesmere’s operations abroad, notably in Dubai, Hong Kong, Oman and Saudi Arabia.
“One shareholder signalled their willingness to inject short-term funding to give the business time to recover”
Several sources close to the situation alleged to CN in November that Lakesmere had been struggling to recoup late payments owed to its Middle East business. It is understood that the group had been waiting on substantial sums of money for work in the region, where payment has often proved challenging for UK firms.
The last straws
The company’s difficulties persisted in 2017 and left Lakesmere “unable to meet its debt commitments”, Deloitte states.
As its performance deteriorated, the firm’s directors approached secured creditor HSBC in late September 2017 to discuss a solution to its financial difficulties.
Despite breaching its financial covenants the following month, Lakesmere was given breathing space to put together a turnaround plan after HSBC decided not to enforce its security rights. One shareholder also signalled their potential willingness to inject further short-term funding into the business to give it time to recover.
Its directors instructed advisers, accountant EY and interim manager Martin Hopcroft to help develop the turnaround plan and to “prepare a finance model for the group to support continued trading and any further request for longer-term funding”.
The following weeks saw painfully slow progress on this plan, however, and a belief grew that the funding required to keep Lakesmere afloat would be greater than had first been thought.
At this point, the shareholder that had considered injecting short-term credit decided against doing so, “unless this was guaranteed to be repaid from assets charged to [HSBC]”.
“McMullen’s cash constraints led many suppliers to stop supplying the business”
Following this change of heart, Lakesmere’s directors concluded that it would be unable to pay its debts and convened a board meeting on 27 October to consider administration.
After meeting with HSBC, the directors agreed to place the company into administration and on 27 October they contacted Deloitte.
Deloitte was instructed to find a buyer for its subsidiary McMullen Facades, which Lakesmere had acquired back in 2012 after it fell into administration.
Following its parent group’s administration, McMullen “no longer had use of the group’s overdraft facility”, Deloitte points out.
McMullen’s cash constraints led many suppliers to stop supplying the business. It subsequently negotiated with key customers over the possibility of releasing funds for certified work early to allow it to continue trading – something customers were initially supportive of, according to Deloitte.
However, on 15 November 2017 McMullen was told that a creditor had filed a winding-up petition against it. Directors’ attempts to negotiate the petition’s withdrawal were rejected, leaving the business with no alternative but to enter administration on 17 November.
In total, 57 companies were approached about buying the subsidiary, comprising 20 financial institutions and 37 “trade parties”. Of these, 30 proceeded to an advanced stage, eventually translating into five firm offers.
JRL, which Deloitte confirms was “the highest bidder”, secured the purchase of McMullen on 22 November. The value of the sale has not been disclosed.
How Lakesmere collapsed: New details revealed