Matalan has been placed in Lloyds Banking Group’s business support unit, which was set up to help troubled companies.
The move comes a few years after Matalan issued nearly £500 million in bonds to help to refinance its operations and to fund a bumper £250 million dividend to John Hargreaves, its founder. The payout remains one of the biggest on record for a British retail company.
The Times understands that the heavily indebted fashion and homewares retailer approached Lloyds late last year and asked to be placed in the bank’s support unit. The request was part of an attempt by Matalan to secure the relaxation of some of the covenants on its £50 million debt facility from Lloyds.
Matalan has not breached debt covenants and does not need to make more drawdowns on its facility. It is understood the retailer made the approach to give it more flexibility if further funds are needed. Matalan’s cash deposits with Lloyds are also understood to be much greater than its £50 million facility.
However, Matalan’s decision to join a division of Lloyds where businesses are subject to more scrutiny and focus will fuel speculation about the retailer’s health. The Skelmersdale-based company increased its credit facility with Lloyds from £30 million in 2014 as part of a refinancing where it also issued £492 million of bonds in two tranches that mature in 2019 and 2020. Since the refinancing, Matalan has experienced difficult trading conditions. In the second quarter, the retailer issued a second profit warning after its earnings plunged by 90 per cent to £2.3 million amid problems at its warehouse in Knowsley, Liverpool.
Last month the budget chain said that its store revenue during the Christmas trading period had fallen by 6.4 per cent to £133.8 million in the five weeks to January 2. Its online revenue also nearly halved during the period and it expects its full-year profit to range between £54 million and £56 million, compared with its previous target of £60 million to £65 million.
The retailer’s bonds have also deteriorated, with one tranche trading at about 73p in the pound last week.
Standard and Poor’s, the rating agency, lowered its long-term credit rating on Matalan in November. It said that the group’s capital structure could become “unsustainable over the long term” if it did not restore earnings in the next two years. However, rival Moody’s held its ratings steady.
One banking contact said entering the support unit could be for “all manners of reasons” and did not necessarily indicate distress. He said the unit helped give businesses closer and more effective attention with many emerging from the division stronger than before. “There is a perfect storm in retail and, if you have a reasonable amount of debt and market conditions are very challenging, then frankly you need to make sure you are getting your product right all the time. I would expect all businesses in the sector are re-examining closely how they run.”
