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Dawnay:Founded upon debt and derivatives

Posted by smeddum on July 20, 2008

Financial Times

By Kate Burgess and Daniel Thomas

Published: July 19 2008 03:00 | Last updated: July 19 2008 03:00

Pity the poor receivers and administrators sent in to restructure the labyrinthine collection of private companies, joint ventures and investments that makes up the crumbling business empire of Guy Naggar and Peter Klimt.

Yesterday, Mr Naggar and Mr Klimt called in BDO Stoy Hayward to act as administrators to Dawnay Day International, the duo’s financial services arm that sits at the centre of a web of holdings.

This comes in the same week that Norwich Union, the group’s biggest creditor, appointed BDO as administrators to recover £750m in loans from companies in the Dawnay Day stable.

Meanwhile, Alan Bloom – a veteran of collapses from Barings to Railtrack – and his team from Ernst & Young have been locked in meetings at Dawnay Day’s impressive offices in Grosvenor Gardens, unravelling a maze of more than 90 operating companies.

E&Y was called in after margin calls on derivative investments forced Dawnay Day to sell a 24 per cent stake in F&C Asset Management.

The sudden disintegration of the business has been all the more shocking to onlookers and staff because Dawnay Day added to its F&C stake just a week before. The first staff knew was when they saw vans parked outside the offices and the artworks that had adorned the walls of Grosvenor Gardens began to disappear.

“Two weeks ago, we were talking about new recruits and assets of more than £1.5bn. Now it seems we were heading at full steam into a brick wall,” says one employee.

“Frankly I do not have a clue what is going on,” says another. “You would have to interview Peter and Guy for 24 hours a day for a week to get the full truth of what is going on.”

Neither Mr Klimt or Mr Naggar, famed for his easy charm, have been seen much. Nor are they saying a word.

But a picture is emerging of highly-geared investments ranging from the Austin Reed men’s wear chain to the Wolseley restaurant, as well as retail parks and hotels around the world, much of it bought using derivatives and funded by debt.

Starlight Investments and Insureprofit, the real estate companies whose creditors called in BDO, are an example. Starlight, it emerges, owed millions to related companies and it also was owed millions by related companies, including DD International.

This sprawling empire – with gross assets of more than $4bn (£2bn), another $6bn under management for clients and more than 1,000 employees – is a long way from the business Mr Naggar, now in his late 60s, bought from Jacob Rothschild in 1982. He started with less than £5m.

Mr Naggar was born in France to Jewish parents during the second world war, grew up in Cannes, claims Italian nationality and has strong family links to Egypt. He trained at Samuel Montague and had been deputy chairman of Charterhouse Bank.

A few years after buying the Rothschild business, Mr Naggar brought in Mr Klimt, six years his junior, as a partner. Mr Klimt, who had his own property interests, was advising him as a tax lawyer at the time. “Peter is the brains. Guy is clever but Peter is a brilliant structuring accountant,” says a close associate.

Their connections stretch across the property and financial worlds from the Reuben Brothers to the Rothschilds. For two decades they built the empire steadily, borrowing enough to invest or set up new property-oriented ventures.

But according to associates, the pace changed about five years ago when Mr Naggar developed ambitions to expand in financial services and create an investment banking boutique under DD International.

He recruited brokers and bankers and seeded 51 per cent-owned ventures such as Dawnay Day Capital Markets, Dawnay Day Structured Finance, Dawnay Day Lockhart and most recently Dawnay Day Investment Banking, formed in May.

These businesses were housed in Grosvenor Gardens with DD International providing a fast track to Financial Services Authority authorisation as well as compliance, administration and banking services and, vitally, cash management. They were kept largely separate from each other.

As the head of one venture says: “All [structural] decisions were taken at the top by Peter and Guy”.

But at the same time Mr Naggar and Mr Klimt were funding their empire by borrowing heavily from almost every big UK and Irish bank.

Then, early in 2007, the duo embarked on a disastrous investment in F&C.

Associates say they were astounded. “Guy always said he would only invest in bricks and mortars.”

They invested using contracts-for-differences – derivatives that give investors exposure to rises and falls in share prices for a fraction of the cost of buying shares. But investors have to put a percentage of the value of the deal as a cash margin. Every time shares move against the CFD holder, they have to put up more cash as a margin call.

The investment was a gamble there would be a bid for F&C. But just as Mr Klimt was hit by personal tragedy – his son has been in a coma since March – F&C shares fell sharply.

Two weeks ago it became clear the margin calls had become unmanageable. Initially, Dawnay Day tried to sell 15m shares at 105p, says an investor offered shares. Two days later that had risen to 95m and the shares were placed at 100p. Dawnay Day realised a £70m loss.

It was, say those close to the group, the final straw after some ill-judged investments, including in the US.

Now BDO has to untangle the morass while associates sever connections if they can.

But there are still many employees in what they thought were profitable joint ventures with DD International desperately trying to extricate themselves from their parent. They know time is against them.

Copyright The Financial Times Limited 2008

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