stores and prospective legal action by disgruntled franchisees. The results for the first half of the 2019 financial year would indicate that the entire company has an uphill battle to stabilise the business. Debt covenants tested A waiver of debt covenants by lenders NAB and Westpac expired on December 31 – and are due to be tested by March 31. Without clear indications of the viability of the company on an ongoing basis, lenders are unlikely to hold their nerve. Directors of the company have been unable to conclude a deal on any asset sales despite the company reporting the Donut King and QSR Division as discontinued operations in its FY19 first-half results released last week. Directors advised investors that negotiations were ongoing but no formal binding agreement had been achieved with a proposed buyer. Retail Food Group made a $403 million provision in FY18, most of that amount for write-downs on goodwill and restructuring costs, including the cost of closing 123 stores in the six months to June 30, 2018. The company has closed a further 93 stores in the latest half year, which along with other restructuring costs and writedowns on the value of assets, forced a further $123.7 million provision on its accounts for the six months to December 31, 2018. The problems for Retail Food Group run deep. Despite culling 216 unprofitable and unfranchised stores, underlying net profits – after allowing for writedowns and extraordinary items – crashed in the latest half by 73.4 per cent to just $6.6 million. Directors have conceded that they have been forced to provide “substantial financial support” to franchisees to “help offset costs such as increasing rents under lease agreements”. The directors have also conceded that challenging retail conditions, the increased occupancy costs imposed by landlords, ongoing negative sentiment in connection with franchising and Retail Food Group are “continuing to place pressure on both the company and its franchise partners”. For lenders, each of those factors is forcing evaluation of whether or not Retail Food Group’s franchise system is viable and can meet its debt commitments. Directors and management are pursuing a range of options to reduce debt but they are racing against the clock with not a lot of good news to share with their bankers. The company has told investors it is looking at alternative funding opportunities to provide the group with a more flexible capital structure, including the attraction of new equity. Seeking a white knight One of the issues for Retail Food Group is that a streamlined store network operating with a franchised business model might be better off leaving the ASX and going private. That move would require a takeover offer from a white knight, a substantial new investor or some debt funding that would allow the company to buy out at least some of its current shareholders. The challenge of continuing as a public company is the uncertainty of future income and profitability given the necessary divestment of some brands, the closure of stores and the future prospects for recruitment of new franchisees in the troubled domestic operation and sales of master franchises to overseas investors. Retail Food Group’s bankers will certainly take some convincing if they are to maintain support for the company that was regarded two years ago as one of the most successful multi-brand franchisors in Australia with overseas master franchises offering strong growth potential. Editor’s note: An earlier version of this story stated Retail Food Group was on the brink of going into voluntary administration. This was based on speculation in the market, and Retail Food Group has since denied any basis for those rumours.