RJH considers the iSoft revolving credit facility in context...

"Manna from heaven!" must have cried iSoft's board when lenders agreed to raise the group's off-balance sheet revolving credit facility from £30m to £85m in 2003/2004. Yet now, hand-in-hand with aggressive revenue recognition (whatever the footnotes to the accounts may claim) the grab for the increase looks a serious mistake.

If the credit facility, probably near its upper limit, is secured against receivables and Deloitte (iSoft's new auditors) require a restatement backing some of these out from the already recognised NHS contract revenues, it may be the case that the facility's outstanding borrowings have/will become under-collateralised.

It is known that over £50m is uncollected under the NHS contract, a piece of business showing over 800 debtor days and with no end yet in sight. A restatement approaching that size will certainly mean the facility is under-collateralised and is the most likely danger to iSoft's financial stability: insufficient collateral assets with which to repay the revolving credit facility.

If iSoft are in default of their revolving credit facility agreement - and it must be touch and go - they are surely arguing the timing of those NHS revenues (20% of turnover) with lenders. Assuming they secure the best outcome of a waiver (for a fee) against whatever financial covenant the lenders have surely protected themselves with, the firm will still face the possibility of increased cost for the facility going forward. But at least that would be better than ceding control over any company assets in order to honour the covenants of the revolving credit facility agreement.

One wonders why iSoft failed to publish the complete detail of the revolving facility in the accounts long ago. Transparency, in a similar vein to confession, improves accountability, business performance, investor confidence and, in due course, share prices.

And it is good for the soul: perhaps iSoft's PR outfit Financial Dynamics might advise their client to frankness in the April pre-close statement, not the misplaced borderline cocky spin which has characterised recent pronouncements. iSoft need to start rebuilding trust with owners.

The writer owns iSoft plc equity

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