This document is taken from Section Six of:-
Fayeds called to account on loans
The Observer, 4 May 1986
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 (if perhaps not all) of his
Sunday, 4 May 1986
Fayeds called to account on loans
by MELVYN MARCKUS, City Editor, and LORANA SULLIVAN
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
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.’
As early as last August, The Observer suggested that the reason AIT attempted to block Burton
Group’s ?566 million take-over bid for Debenhams (by acquiring a near 30 per cent stake) was the
hope that all of House of Fraser’s stores — except Harrods — could be merged with Debenhams and a share quote regained.
Last month The Observer revealed that George Davies, chairman of Hepworth, held talks with the
Al-Fayeds with a view to acquiring all the House of Fraser stores — except Harrods — for
?450 million. Davies took the initiative following Burton’s acquisition of Debenhams, but the talks
abruptly broke down in January.
Meanwhile, back at the Paris Ritz (owned by the Al-Fayeds) news comes of a 1984 loss of
33.9 million French francs – more than twice the loss for 1983. The Ritz is being extensively
According to the Ritz 1984 report and accounts, ‘the company has also revised the valuation of
freehold land and buildings downward by 10.5 million French francs at 1 January 1984.’