UK high st slowdown stretching banks' provisioning limits

C banner International Holdings

17/05/2018 11:12

By Sandrine Bradley and David Brooke
    May 17 (LPC) - Banks are increasingly wary of lending to the
UK retail sector as shoppers continue to desert the high street
in favour of lower cost online rivals, raising the prospect of
further loan losses, banking sources said.
    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.
    Household names including mother and baby products retailer
Mothercare  MTC.L , restaurant chain Prezzo and carpet retailer
Carpetright  CPRC.L  have announced trading difficulties
recently.
    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.  urn:newsml:reuters.com:*:nL5N1SO17K
    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 FUNDING
    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)
 ((sandrine.bradley@thomsonreuters.com; +44 20 7542 0651;
Reuters Messaging:
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