The Issa Brothers and What Debt Actually Means

A big story in retail at the moment is how the Issa brothers are using large amounts of debt to buy up sizeable minority stakes in a range of different businesses. Supermarkets, petrol stations, and fast food outlets are all joining their portfolio. But how are they doing it if they don’t have a seemingly endless supply of liquid cash they are sat on? They’re doing it by reminding all of us what debt really means.

Being in debt when you are purchasing and then running a company is not the same as when you are simply meeting your household bills. A late household bill becomes a debt that you are immediately liable for because it has not been pre-agreed with the lender. The Issa brothers, on the other hand, are making use of what is known as Debt Financing to purchase large stakes in a number of retailers and High Street names.

What is debt financing?

If you take out a personal loan, you will get better terms and be able to borrow more money if you secure the loan against a tangible asset. The best example of this is a standard family mortgage where you can borrow hundreds of thousands of pounds but will lose your home (the asset the mortgage is secured against) should you fail to keep up with the repayments.

While a bank will give you a secured loan to cover the purchase price of your home, you are only likely to be offered unsecured personal loans that cover 10% of the mortgage. What we learn here is that securing a loan against a real-world asset unlocks significant borrowing power.

Why do the Issa brothers use debt financing?

They want to be able to drive rapid expansion of their investment portfolio, and they need to do this without sitting on a large stockpile of liquid cash. Any high-level investor will tell you that a large pile of cash is basically sat there doing nothing while being at the mercy of inflation. As any sensible billionaire duo would, the Issa brothers put their money to work by putting it into assets that they predict will appreciate over time.

Using debt to cover the cost of the acquisition allows them to borrow far more money than they would be able to if they were looking for unsecured funding. And because they’re focusing on retail brands, there’s plenty of physical assets in the form of stock and storefronts they can secure the loans against.

Is debt financing akin to bending the rules?

While some will say that saddling a business with debt on day one of new ownership restricts its options, others will argue the complete opposite case. The point to remember here is that debt financing is a perfectly legal and valid means by which you can acquire a business.

What investors like the Issa brothers are doing is effectively doubling down on their predictions for the future of each business they add to their portfolio. They are investing in the first place because they think they can add value and drive up the share price, and so they’re confident that the returns the business makes will be able to grow fast enough to service the debt. While this is something that the average person in the street may feel is wrong during a cost of living crisis, the point is they aren’t really taking money out of the company.

Debt funding is not the same as taking all of the assets out of the business — it’s a means of acquiring a large stake so you can then drive faster growth. Investors who use this approach will argue that what they’re really doing is injecting fresh ideas and better prospects into a business by handing it over to new leaders. If the share price remains high for 12 months or more after the acquisition, they will have proven themselves to be right.

What does the future look like?

New leadership and fresh ideas can often be exactly what’s needed to turn a business into a far more lucrative operation, but a word of warning is needed. If significant parts of the retail sector change hands via debt financing, it could become more exposed to widespread economic downturns.

A business that has to service debt effectively has a larger overhead every month than its competitors, which when spending becomes globally constrained can set it back. But rather than seeing this as a reason to call for investors to be more restrained, we think there’s a lot to be said for a slightly more positive outlook.

When a high-level investor gives a business their full attention and selects it based on predicted future performance, this is a show of confidence in the retail sector. They believe that they can bring people back onto the High Street, so they return to physical stores, and that’s precisely what this sector needs right now. It’s certainly possible that when a couple of high-profile success stories are aired, others will quickly follow as secondary investors look to jump on the bandwagon. Ideal when you want to be able to create a thriving, resilient, and forward-thinking retail sector that meets the needs of consumers while being prepared for the wider economic outlook.

In Conclusion

The point is that there are actually two distinct types of debt. Simple, everyday debt like being late on a household bill or owing money elsewhere due to small loses incurred when playing in an online casino is very different to the structured debt the Issa brothers use for leverage. Remembering this distinction will give all of us a much greater appreciation of how the retail world is changing at pace, even during a time in which liquid assets are heavily constrained.