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UK retailers are increasingly falling between the cracks of various government support schemes, with large companies facing stringent credit rating criteria and banks still reluctant to lend to smaller ones.
Among the large publicly traded retailers, only Next, Marks and Spencer and Associated British Foods, the owner of Primark, have confirmed a successful application for the Coronavirus Corporate Finance Facility.
Frasers, the group formerly known as Sports Direct, said last week that it had not been deemed eligible for the scheme.
Dixons Carphone, another high-street retailer, said on Wednesday that it remained in discussions about accessing the scheme although it did not currently envisage needing extra funds.
JD Sports and Kingfisher, both FTSE 100 groups, declined to say whether they had applied for the scheme.
The CCFF allows companies to issue short-term debt which is then purchased by the Bank of England. So far, around £10.7bn has been issued by 35 companies.
One bank executive acknowledged there were gaps in the government schemes. “Our expectation is that they will start getting filled by HM Treasury or the Bank of England loosening the criteria,” he said.
According to Moody’s, only M&S, Kingfisher and Next had investment grade credit ratings — one of the criteria for CCFF access — as of the March 1 cut-off date. Since then, Next has been put on watch for a downgrade, while M&S has been downgraded.
A number of other retailers, including frozen food group Iceland, fashion chains New Look and Matalan, online retailer Very.co.uk and department store group Debenhams, have bonds rated junk.
Neither Dixons nor Sports Direct has a credit rating, since they have never issued publicly traded debt. Applicants without a credit rating must “demonstrate they were in sound financial health prior to the shock” — usually by applying banks’ internal credit ratings.
Retailers deemed ineligible for the CCFF can apply to the Covid Business Interruption Loan Scheme, whose loans are 80 per cent guaranteed by the Treasury but capped at a relatively low £50m.
Matalan, which is seeking around £60m of additional funding, said on Monday that two of its existing lenders would only lend under the business interruption scheme if the new debt ranked alongside the most senior in its capital structure. That would require consent from bondholders, which may take some time to obtain.
The CBIL schemes are administered through commercial banks, many of which appear reluctant to risk even the 20 per cent of capital that is not covered by the government guarantee.
Matt Clark, a managing director at AlixPartners, said that even before the Covid-19 pandemic began, banks “had been reducing their exposure to retail left, right and centre”.
The chief executive of a smaller retailer said an existing lender had told him it was not prepared to extend further loans before the pandemic began and that the existence of a partial government guarantee had not altered that position.
He added that it was fanciful to expect businesses to provide cash flow forecasts or going concern assurances given the uncertainties about trading.
Retailers could in theory still turn to asset-based lenders, which extend credit against inventory or property and have increasingly stepped into the gap left by risk-averse banks.
But Mr Clark pointed out that “the issue now will be how to value that inventory. The next six months are going to be a bloodbath, there will be lots of discounting as retailers are run for cash”.
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