How clothes retailer Peacocks ran up £750m debts
The retailer Peacocks is the biggest company in Wales to have collapsed in recent years.
There are not many firms with a headquarters in Wales with a turnover of more than £700m.
A number of reasons have been cited for the failure, including the role of the Royal Bank of Scotland (RBS) during talks to restructure its debts.
But the reality is that Peacocks was brought down by the deal that allowed a management buyout in 2006.
The context is important here, in 2005 Peacocks was a plc and expanding strongly.
A few years earlier it had bought the Yorkshire-based retailer Bonmarche, which had 350 outlets.
There were already 418 Peacocks stores at the time.
But the chief executive Richard Kirk felt it was not being taken seriously enough by investors in London and he led a management buy-out so the firm could expand at a faster rate.
In order to do it, the company borrowed £460m.
The last official company accounts we have date from 2010, and they show that by then the company's overall borrowings had risen to £596m.
The administrators KPMG now say the overall debt stands at £750m.
That debt is around the same as the overall sales of the group.
It means that every pound being taken at the tills is ultimately owed to someone else.
The debts became too much for Peacocks which went into administration last week after talks on restructuring part of the debt collapsed.
The taxpayer-owned RBS was one of the lenders which refused to pump any more cash into the business.
Despite being heavily criticised by some local MPs and many of the staff, RBS insists it was not alone in refusing to invest any more.
The reason Peacocks' debt rose so much was because of part of its borrowings called Payment in Kind or Pik notes.
These have high interest rates, in this case 17% charged on a compound basis, but the interest is deferred and rolled over for repayment later on.
When the times are good, they allow companies to grow quickly by putting off repayment.
But eventually they have to be dealt with.
At the time of the management buyout in 2006, Peacocks owed £150m pounds in Pik notes.
In 2010, that debt had risen to £300m.
'Mountain of debt'
Before the company went into administration, those Pik notes were said to be worth close to £400m.
In a business selling relatively cheap clothing where there are tight profit margins, the banks could not see a way where Peacocks could get close to paying off this debt.
In defence of Peacocks' directors, the management buy-out which saddled the company with so much debt was a deal done at the height of the buy-out boom when many similar deals were being signed off.
The model works if the company is sold off after a few years at a higher price but in this case the credit crunch and the recession made that difficult.
Sadly, it shows that in recent years, the success of one of Wales' most high profile and biggest companies was built on a mountain of ever-increasing debt.