Lenders, predominately UK banks, have already taken big hits on £1.6bn of syndicated loans following UK services company Carillion’s (CLLN.L) liquidation in January, and have limited capacity to absorb more losses.
“I think UK banks have already used up their budget for provisioning in the first quarter of the year. They need a safe ride now – a couple more hits and they will turn the tap off,” a banker said.
As lenders continue to provision for potential losses, any further distress on the high street in the second half of the year could cause banks to shut up shop and stop lending as they reassess their exposure to the troubled retail sector.
“If there are any more default type situations there will be a serious shutdown (in lending) to the high street. Banks can absorb these losses so far, but much more and lending could fall off a cliff,” the first banker said.
A second banker agreed: “I think most people will stay away (from high street lending) – both funds and banks.”
HIGH STREET SLUMP
The UK high street has been hit by several factors including a fall in consumer demand powered by a move to online shopping, high rents and over expansion in the last decade.
“A combination of factors will continue to wreak havoc on the high street for at least another year,” a third banker said.
Mothercare has a £62.5m revolving credit facility from HSBC and Barclays, comprising a £50m tranche maturing in May 2020 and a £12.5m tranche maturing in November 2018, according to data from Thomson Reuters LPC.
On Thursday Mothercare said it would close 50 more stores and ask shareholders for £28m in an equity raise. In addition the firm said it has also secured revised committed debt facilities of £67.5m, £8m of new shareholder loans and a new debtor backed facility of up to £10m pounds from a trade partner.
Other names facing problems are Prezzo, Carpetright and department store chain House of Fraser, which all have outstanding bank loans, according to the data.
Private equity firm TPG acquired Prezzo in 2014, backed with a £155m leveraged loan financing, comprising a £130m term loan and a £25m revolving credit facility arranged by Barclays and Jefferies.
Carpetright has a £45m revolving credit facility which matures at the end of July 2019 and annually renewable overdraft facilities of £7.5m in the UK and €2.4m in the rest of Europe. National Westminster Bank is the company’s principal banker.
The company has agreed a £15m interim loan from Meditor European Master Fund ahead of an equity raise, which a company spokesperson said was set to launch imminently, and extends the maturity of the £45m revolver to the end of 2019.
House of Fraser has a £125m term loan and a £100m revolver both maturing in July, provided by HSBC and Industrial and Commercial Bank of China. House of Fraser is planning to raise £70m in a private placement of shares with Hong Kong-based retailer C.banner (1028.HK).
House of Fraser and TPG declined to comment.
Banks’ exposure to these names is relatively small, but could push lenders over provisioning limits combined with losses already taken after Carillion’s collapse.
Five UK banks took heavy losses and provisions on loans to Carillion following its liquidation in January. Royal Bank of Scotland, HSBC, Santander, Lloyds and Barclays were among the most heavily exposed after providing £140m of emergency loans to the company in September 2017 and were also lenders on a £790m revolving credit facility.
Those two loans made up the bulk of Carillion’s £1.6bn of committed debt facilities at the time of collapse. Barclays had further exposure after providing one of two bilateral loans totalling £45m with Germany’s Helaba Bank.
Six banks, including RBS, HSBC, Santander and Lloyds, also provided another £350m of early prepayment facilities to Carillion’s operating company.
The situation is exacerbated by the uncertainty around Brexit and what this will mean for UK PLC in general.
“There is a serious amount of uncertainty around UK PLC and its prospects post Brexit – there is a lot of underplayed caution,” the first banker said.
The Bank of England is now asking UK banks for monthly reports on their lending to UK companies and is seeking additional information on general forward looking market trends and conditions for the sector from banks’ front offices, he said.
Private debt funds could potentially provide an alternative source of finance for struggling high street businesses but are now also more cautious about lending to the high street.
Many of these funds have historically steered away from highly cyclical high street retailing, but those that did invest have experienced problems in recent months.
US financial services group Wells Fargo is facing issues with a £10.7m loan to Rutland-owned electronic goods retailer Maplin, which began liquidation proceedings earlier this year.
Meanwhile the private banking and asset management firm LGT has run into problems with online furniture store sofa.com, after funding its acquisition by private equity firm CBPE in 2015.
“It is a tough sector,” said one manager. “Most will stay away because of the risks.”
Rutland Partners and sofa.com could not be reached for comment.
Editing by Christopher Mangham and Tessa Walsh