Could massive debt sink a ferry operator?

Islanders know that our ferry companies carry huge debts along with vehicles and passengers, but according to official paperwork, it could be close to crunch time for one of the Island’s cross-Solent ferry operators.

Analysing the accounts

The 2022 accounts of Red Funnel Limited, filed in October 2023, reveal that a huge bank loan is due to be repaid in just a few weeks’ time. Initially taken out in 2017, the loan of £40.7 million is due to be settled next month (July). This is the most pressing debt, and is on top of other bank debts of £29.8 million which must repaid by the end of 2027, with another £39.6 million due after that. These external loans total over £110 million. Additionally, Red Funnel also owes more than £184 million internal debt within its group of companies, earning interest for shareholders at 6 per cent every year. The interest on this debt alone equates to around £78 for every single Islander.

In total, the company owes more than £294.3 million — a massive debt that must be serviced from fares.

What are Red Funnel’s options?

If shareholders are unwilling to stump up another £40 million, or unable to find finance for the already heavily-indebted company, they could sell up. The accounts value Red Funnel at over £341 million (share value plus internal debt). Anything near this price seems unachievable, as the company’s latest declared industry-recognised profit is less than £15 million, with the accounts showing an overall loss of £27.7 million. Any new owners would still be burdened with £110 million in bank debt and ageing vehicle-carrying ships, needing replacement at an estimated cost of £100 million. The viability of continuing the Red Jet service with only two vessels, is questionable, and relentless bad press about reliability over recent years would doubtless ring alarm bells with potential purchasers.

Adding to the uncertainty, Labour’s Richard Quigley work behind the scenes that has led to Keir Starmer’s welcome announcement that a Labour government would ask the Competition & Markets Authority to decide whether intervention is needed over Red Funnel and Wightlink’s operations. This potential scrutiny adds another layer of uncertainty about future profits which could put off potential purchasers or reduce the price they are willing to pay.

All this indicates that Red Funnel’s current owners must either quietly repay or renegotiate the £40 million debt very soon, go into administration, or urgently agree terms with a buyer. Insiders expect a significant announcement over the coming weeks.

Red Funnel response

When these figures were put to Red Funnel, a spokesman responded: “Whilst we are unable to share commercially sensitive information, we can confirm that the financials referenced are out of date and therefore no longer relevant.”

The IW Observer is happy to confirm that all information comes from the latest publicly available figures, which are the 2022 accounts. To avoid asking for confidential information we then asked for a simple statement of fact on whether the 2023 accounts have been approved (for 2022’s accounts this happened in April 2023). We received no response. Before Red Funnel’s auditors can approve the accounts, they must confirm the business is a going concern with sufficient funds available for the next 12 months, impossible unless and until the £40 million pound loan has been dealt with.

Leanna Lakes, Red Funnel’s Scotland-based operating director, is said to have recently told East Cowes Town Council that the company is not for sale, despite the departure of eight of Red Funnel’s directors in March and persistent rumours that Irish Ferries and other potential purchasers, have been in talks with the current owners. We asked the company for a comment and also whether it is true that senior managers have recently been required to sign non-disclosure agreements (or ‘gagging orders’) preventing them from discussing any sale outside the organisation. Red Funnel did not respond.

Islanders all know that, as well as our vital links to the mainland, the ferry operators are crucial to the Island’s economy. The uncertainty surrounding Red Funnel’s financial stability could have far-reaching consequences for the Island.

The IW Observer will keep our readers informed.