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Index to British press articles on the Fayeds' purchase of Harrods

Based on research by Lorana Sullivan, this article exposes how Mohamed Al Fayed had re-financed House of Fraser with borrowings since his & his brothers' acquisition of the stores group 14 months earlier.  The implications of her findings are clear: - after buying House of Fraser with the Sultan of Brunei's money (exactly as she, her colleagues, and her proprietor Tiny Rowland alleged) Fayed had then used the stores group as collateral to raise loans to repay the Sultan most (though not all) of his cash.

The Observer 
Sunday, 4 May 1986

Despite the vast reputed wealth of Egyptian businessman Mohamed Al-Fayed and his two brothers, records filed at Companies House reveal that House of Fraser Holdings, which owns Harrods and is controlled by the Al-Fayeds, has borrowed heavily. 
    Two months ago borrowings amounting to £430 million by House of Fraser Holdings were financed by a syndicate of banks led by Samuel Montagu. 
    In reality House of Fraser Holdings' borrowings have been refinanced twice since 30 April 1985 -- first by the Swiss Bank Corporation and latterly by the Samuel Montagu syndicate. 
    During the acrimonious take-over in March 1985, which effectively placed House of Fraser and its Harrods flagship under the control of a Liechtenstein company owned by the three Al-Fayeds, funding was queried repeatedly by Lonrho's chief executive R. W. Rowland. 
    Lonrho sold the initial 29.9 per cent stake in House of Fraser to the Al-Fayeds after its own attempts to acquire House of Fraser were frustrated by the Government.  The Observer, which is owned by Lonrho, has received two libel writs from the Al-Fayeds as a result of articles suggesting that outside financing was required for the House of Fraser purchase. 
    Throughout the controversy -- and as late as 25 June 1985 -- John MacArthur, a director of merchant bankers Kleinwort Benson, advisers to the Al-Fayeds, insisted that 'their net worth, from what I know, is several billion dollars.'  MacArthur stressed that the brothers had neither drawn on bank borrowings nor loans from any other party to make the purchase. 
    The official offer document stated that Alfayed Investment & Trust (AIT) had paid-up capital of £1 million; an investment at cost in House of Fraser shares of £139.7 million; a loan of £137.8 million from its Liechtenstein parent, Alfayed Investment & Trust SA, (of which £35 million had been refinanced by a bank loan); and a bank overdraft of £900,000. 
    A further purchase of £34.4 million House of Fraser shares was to be financed by an increase in the loan account from the Liechtenstein parent. 
    According to the offer document: 'Additional funding for AIT will be in the form of a further interest-free loan from AIT SA and any Loan Notes issued in connection with the Ordinary offer.  It is the intention that AIT's issued share capital will subsequently be increased substantially to an appropriate level in relation to other funding, and that a proportion of the loan from AIT SA will be replaced by bank borrowings.' 
    As for the Liechtenstein holding company, 'AIT SA's only significant assets consist of its holding of shares in, and loans to, AIT.'
    The document added: 'AIT SA is currently funded by interest-free loans from Mohamed, Salah and Ali Al-Fayed and by bank borrowings.' 
    Rowland has constantly challenged the content of Kleinwort's offer document, dated 23 March 1985.
    In a recent letter dated 21 April 1986 to Michael Hawkes, chairman of Kleinwort Benson, Rowland alleged: 'You have not corrected the statements and legal documents issued by the bank at the time...'
    By 30 April 1985, according to the accounts, paid-up share capital of House of Fraser Holdings had indeed been increased -- to £50 million.  A subordinated loan due in 1995 from the Liechtenstein parent appeared on the books at £100 million.  But a new entry was bank loans due in 1988 listed as a huge £347.8 million.  House of Fraser shares -- 89.95 per cent of the share capital -- were carried at £512.8 million, and there was a commitment to spend close on £62 million on buying the remainder. 
    There was more to come: 'Subsequent to 30 April 1985 and to the acquisition of the remaining House of Fraser plc Ordinary shares, the total outstanding bank loans were re-financed through a term-loan and guarantee facility of £340 million, part of which is secured on the assets of the company,' a footnote states.      'This facility expires on 30 June 1988 and interest is payable on amounts drawn at rates varying with the London Inter-Bank Offered Rate.  In order to reflect overseas legal requirements imposed on the lending institution, the facility may be revoked at any time, on both sides, despite the fixed maturity.' 
    The company's mortgage register shows that on 17 December 1985 the Swiss Bank Corporation executed two loan agreements with the company for £215 million each, following upon counter-indemnities dated 12 April 1985.  One facility was secured by a first floating charge over the company's rights and property assets, while the other was secured by a legal charge over 153.4 million House of Fraser Ordinary shares and 80.5 million Deferred shares. 
    Both charges were satisfied on 3 March 1986.  On the same day, a new legal charge was created, under a new facility agreement dated 19 February 1986. 
    This time, Samuel Montagu -- Midland Bank's merchant banking offshoot -- acted as agent for a syndicate of financial institutions which had provided a facility of unspecified size.  In return, Samuel Montagu, as agent for the syndicate took a legal charge over various House of Fraser Holdings assets. 
    Since acquiring House of Fraser, the Al-Fayeds must have become increasingly conscious of the interest being charged on their various borrowings.  In its fiscal year to 28 January 1984, the old House of Fraser company paid £8.4 million in interest.  Unaudited mid-year results to 28 July 1984, which were shown in the offer document, showed interest payments in that period of £5 million.  But, even in the face of higher interest charges, House of Fraser's board estimated pre-tax profits for the fiscal year to 26 January 1985 at £48 million.  It is inevitable that interest payments on House of Fraser Holdings' own borrowings ate a substantial hole -- probably more than £30 million -- in the projected profits. 

    The extensive borrowings and their resultant interest charges call into question the statement in the Kleinwort Benson offer document that: 'AIT intends to allow the management of House of Fraser extensive autonomy.  This, combined with the commercial and financial backing of the Al-Fayed brothers which will be available through AIT, should enable House of Fraser to build on its recent successful record and further improve its performance.'

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