Lenders Offer Breathing Room for U.K. Stores But No Magic Wand

(Bloomberg) --

Lenders are giving U.K. retailers some breathing room amid the coronavirus outbreak, but the stores’ struggles are unlikely to end as soon as the lockdown lifts.

Next Plc, Marks & Spencer Plc and Associated British Foods Plc, owner of Primark, have all managed to waive covenants on their debt in recent weeks, ensuring lenders won’t demand repayment if terms aren’t met. Other retailers, including Matalan, are in talks to obtain more funding.

Creditors to the U.K. high street have a difficult decision on their hands. Refusing help to retailers during the lockdown may trigger their collapse, leading to thousands of job losses. But many retailers were already in trouble before the onset of the coronavirus as customers moved toward on-line shopping.

“I don’t think lenders have a choice really,” said Olivier Monnoyeur, a portfolio manager at BNP Paribas Asset Management, which oversees more than 400 billion euros ($438 billion) of assets. “You want to give a covenant holiday to the retailer and let the storm pass, and then eventually figure out later who the winners and losers are.”

M&S declined to comment for this article and pointed to a previous statement about its move to secure liquidity. A Next spokesman highlighted its Q1 trading statement which emphasized that the company can “operate comfortably within its cash resources.”

An ABF spokesperson wrote that the company is “confident it has the financial headroom to meet the challenges ahead.” Matalan declined to comment.

In recent weeks the list of troubled retailers filing for administration has grown to include fashion chains Laura Ashley, Oasis and Warehouse, as well as department store Debenhams.

“You have to be pretty brave to be invested in non-food retail right now,” Monnoyeur said, adding that the high-yield team at the asset manager is “very cautious” on the sector.

Lifting Lockdown

Lenders and retailers are both focusing on when the lockdown will lift and how. Prime Minister Boris Johnson is expected to set out a plan for how businesses and schools will re-open this week.

But retailers do not expect demand to snap back when stores do reopen, as shoppers fear exposure to the virus. More than a quarter of consumers surveyed by Retail Economics said that the coronavirus would have a “permanent impact” on the way they shop.

Among the developments last week, M&S said it managed to relax covenants on its 1.1 billion pound revolving credit facility and Next’s banks agreed to waive debt tests until January. ABF gained the same reprieve for its debt covenants in February.

Sofa-retailer DFS Furniture Plc agreed a new 12-month bank facility of 70 million pounds last month and in the meantime, terms on its debt will fall away. DFS declined to comment for this article but highlighted a previous press release noting its “financial resilience”.

“There is an onus on lenders to be as lenient as possible,” said Neill Keaney, an analyst at CreditSights in London. “There does seem to be a willingness not to push a business over, certainly from the bank lending point of view.”

The U.K. government and financial regulators have urged banks to keep lending to companies and to be lenient when it comes to potential covenant breaches. But many stores are still struggling to access state-run loan programs.

“Lenders are generally being reasonable with the larger Plcs who have a plan for surviving and exiting the crisis,” said Charles Allen, a retail analyst at Bloomberg Intelligence. Some smaller retailers, on the other hand, have not been extended credit, he said.

Landlords are also feeling the pain as many retailers seek rent holidays to ride out the lockdown. The coronavirus outbreak will trigger as much as 10 billion pounds of losses and write-offs on loans tied to U.K. stores and malls, according to a survey of lenders by Cass Business School last month.

And while the retailers themselves may keep their heads above water with VAT deferrals as well as holidays from rent and business rates, those temporary respites will all add to their overall debt pile.

Many people have a vested interest in keeping troubled firms going because pulling the plug would expose their own “deficiencies in judgment”, according to Richard Hyman, an independent retail consultant.

“It’s much easier and seductive to think we’ll put a bit more money in and kick the can down the road,” he said.

©2020 Bloomberg L.P.