Matalan has acknowledged it may not be able to continue operating if it is unable to finance a significant chunk of its debts by January, despite a recovery in trading.
The UK value retailer has already replaced a revolving credit facility and £16.7mn borrowed under the government’s Covid-19 loan scheme with a new £60mn credit facility, and plans to repay £27mn of high-interest loan notes from its cash reserves.
But a much larger £350mn tranche of secured debt falls due for repayment early next year and will require refinancing.
The Liverpool-based group, which employs almost 11,000 people and has more than 200 stores, stated that “the ability to successfully refinance our debts involves geopolitical, economic and market factors outside the direct control of the business”.
This uncertainty “may cast significant doubt on the group’s . . . ability to continue as a going concern”.
Debt markets for riskier borrowers in Europe remain largely dormant following Russia’s invasion of Ukraine, although there is more sign of activity in the US. Matalan tested appetite for a debt refinancing in February but did not secure sufficient support.
Bankers acting for Wm Morrison, the supermarket chain that also needs to refinance heavy short-term borrowings arising from its acquisition by a private equity group, have resorted to placing debt privately at a discount because of the difficulty in raising debt on public markets.
Matalan said talks with lenders were “at an advanced stage” and that it believed it could complete the refinancing before January. It is being advised by restructuring experts at Teneo, who also oversaw the recent prepack administration of Missguided and the complex administration of Sir Philip Green’s Arcadia empire.
But two separate groups of creditors have appointed their own advisers and fixed-income analysts said the bondholders could conceivably take control of the business, as happened with New Look and Debenhams.
Unlike those businesses, which were suffering from declining sales and weak margins when they recapitalised, Matalan is trading well. Results for the year to February showed sales exceeding £1bn from £744mn the year before as the impact of Covid-related store closures reduced.
The group made an operating profit of £92mn against a £27mn loss the year before and total sales in the first quarter of its new financial year were up 29 per cent from a year ago.
Matalan is controlled by a single entity, the family of Monaco-based founder John Hargreaves, which may make any restructuring simpler. Hargreaves has already extended financial support to the company by buying and leasing back its head office for £25mn.
He has also converted £50mn of its debt into payment-in-kind notes, which allow interest to be rolled up instead of paid out. Some £27mn of interest has now accrued on these.
Even if credit markets do open up sufficiently to allow a refinancing, the backdrop of rising interest rates means the terms are likely to be less generous than the current 6.75 per cent coupon on the senior debt.
Matalan is one of several retailers that were able to run with comparatively high leverage during a prolonged period of low interest rates. But many of the others, including online retailer Very Group, frozen foods chain Iceland and supermarket group Asda, completed large refinancings last year.