BWS SECURITY SYSTEMS LIMITED - Credit Assessment

1. Credit Opinion: CONDITIONAL

BWS Security Systems Limited demonstrates a long trading history (incorporated 1999) and strong asset growth trajectory, with net assets increasing from £679,514 (2016) to £3,636,189 (2025). However, several material concerns warrant a conditional rather than outright approval:

• Group-level distress: The going concern note discloses that the Shield Topco Limited group made a loss of £559,901 and had net current liabilities of £2,621,886 as at 31 March 2025. While refinancing has been completed, this indicates financial pressure at the consolidated level.

• Debtors concentration risk: Trade debtors have surged to £4,389,415 (FY2025), representing 91% of current assets and up from £3,826,731 in FY2024. This level of debtor concentration poses significant collection and liquidity risk.

• Cash deterioration: Cash has declined substantially from £1,505,134 (FY2021) to £256,996 (FY2025), despite asset growth, suggesting cash conversion challenges.

• Liability growth outpacing assets: Current liabilities increased 45% year-on-year (£2,644,240 to £3,833,927), significantly outpacing current asset growth of 14%.

Recommendation: Approve with conditions including group guarantee from Shield Topco Limited, financial covenants around debtors days and cash conversion, and quarterly monitoring.

2. Financial Strength

Balance Sheet Summary (FY2025): | Metric | £ | Comment | |--------|---|---------| | Net Assets | 3,636,189 | Strong and growing | | Shareholders' Funds | 3,636,189 | Consistent with net assets | | Share Capital | 100 | Nominal only | | Retained Earnings | 3,636,089 | Organic equity build |

Asset Composition: - Intangible Assets (£1,272,067): Primarily goodwill from acquisitions, representing 17% of total assets. Subject to impairment risk. - Tangible Assets (£92,954): Minimal fixed asset base - typical for service-oriented security businesses. - Investments (£1,284,338): Significant increase from £103 in FY2024, likely inter-company loans within the group. - Debtors (£4,389,415): Dominant balance sheet item at 59% of total assets. Requires scrutiny.

Leverage Analysis: | Ratio | FY2025 | FY2024 | Trend | |-------|--------|--------|-------| | Total Liabilities/Total Assets | 51.2% | 46.5% | Deteriorating | | Current Liabilities/Total Assets | 51.2% | 46.5% | Increasing | | Equity Ratio | 48.6% | 53.2% | Declining |

The balance sheet shows growth but with deteriorating quality. The increasing proportion of debtors relative to total assets (from 67% to 59% of total assets year-on-year) and the significant investment balance suggest the company may be financing group operations or acquisitions at the expense of liquidity.

3. Cash Flow Assessment

Liquidity Position: | Metric | FY2025 | FY2024 | Movement | |--------|--------|--------|----------| | Current Assets | 4,834,720 | 4,228,654 | +606,066 | | Current Liabilities | 3,833,927 | 2,644,240 | +1,189,687 | | Net Current Assets | 1,000,793 | 1,584,414 | -583,621 | | Cash | 256,996 | 231,360 | +25,636 |

Key Ratios: | Ratio | FY2025 | FY2024 | Benchmark | |-------|--------|--------|-----------| | Current Ratio | 1.26x | 1.60x | >1.5x preferred | | Quick Ratio | 1.21x | 1.54x | >1.0x minimum | | Cash/Current Liabilities | 6.7% | 8.7% | Concerning |

Working Capital Concerns: - Net current assets have declined by 37% year-on-year - Current liabilities grew 45% while current assets only grew 14% - Cash covers less than one month of current liabilities - The group-level net current liability position of £2,621,886 creates contagion risk

Cash Conversion Trajectory: | Year | Cash | Net Assets | Cash/Net Assets | |------|------|-----------|-----------------| | 2021 | 1,505,134 | 2,396,001 | 62.8% | | 2022 | 719,547 | 3,134,767 | 23.0% | | 2023 | 496,100 | 2,342,796 | 21.2% | | 2024 | 231,360 | 3,027,056 | 7.6% | | 2025 | 256,996 | 3,636,189 | 7.1% |

The company is growing its balance sheet but not converting to cash. This pattern often indicates overtrading or aggressive revenue recognition through inter-company transactions.

4. Monitoring Points

Critical Metrics to Watch:

1. Debtors Collection: Monitor debtor days monthly. At £4.38M debtors, even a 10% provision would eliminate net current assets. Request aged debtor analysis as a condition of any facility.

2. Group Cash Flow: The Shield Topco Limited group has net current liabilities and made a loss. Require quarterly group-level management accounts and cash flow forecasts.

3. Inter-company Balances: The £1.28M investment balance (up from £103) requires explanation. If this represents loans to group companies, it represents a significant cash drain and subordination risk.

4. Refinancing Terms: The group has refinanced senior bank debt with a bullet repayment due in 5+ years. Obtain details of facility terms, covenants, and security structure.

5. Going Concern Dependencies: The company's going concern assessment relies on group-level forecasts. Independent assessment of the company's standalone ability to service debt is essential.

6. Current Liability Composition: Request breakdown of the £3.83M current liabilities to understand trade creditor, tax, and inter-company split.

Recommended Covenants:

• Minimum current ratio of 1.2x
• Maximum debtors days of 90 days
• Minimum cash balance of £150,000
• Group guarantee from Shield Topco Limited
• Negative pledge on group asset disposals
• Notification of any inter-company transactions exceeding £50,000

Review Frequency: Quarterly