This might sound like an understatement, but now is not the best time to be looking to refinance a retail business.
This might sound like an understatement, but now is not the best time to be looking to refinance a retail business .
New Look is just one of several retailers that are looking for new ways to address this challenge right now. In fact, recent news reports have claimed that New Look is currently holding discussions with a number of advisers with a view to helping the company with negotiating a refinancing.
The company has already agreed a deal to extend the maturities on its senior debt until 2015, giving it further time to consider options. But what options do UK retailers really have?
The major banks are paranoid about lending to the sector, and perhaps justifiably so, when you consider how much money has been lost through administrations in the past few years.
The problem is that banks now know what analysts have been saying for years: that the speed at which value can erode from a retail business can be jaw-dropping. As a result, there is a profound reluctance to lend to ‘old style’ retailers.
Plus, just as Basel III has strengthened the link between the cost of capital with the risk rating of the investment being considered, changes in consumer spending patterns have made it difficult to create a compelling business case for improving or opening additional bricks and mortar stores.
Of course, some banks may be tempted to agree to deals like these in exchange for a higher margin, but this strategy doesn’t sit well with credit committees who are employed to mitigate risk by measuring the likelihood of the facilities being repaid in full.
Retail bonds are another option. Tesco tried this route back in May 2012 with a retail corporate bond issue that promised to pay five per cent per year, but for many the cost of raising capital in this way will simply be too high for many.
As a result, some retailers have even turned to their suppliers for help, but this option will really only be attractive for cash-rich suppliers that are looking to protect an extremely limited distribution channel, such as American Greetings when they took control of Clinton Cards. And how many of those are there?
So the question remains: where else can retailers turn? Schemes like the Business Growth Fund may be an option for smaller and medium sized businesses. Manchester-based Boost Juice Bars just accepted £2.5 million of growth capital in exchange for a minority stake in the business.
For larger companies, more traditional private equity firms may be an option, but that approach is less about borrowing money and more about accepting funds in exchange for equity (or, in some cases, quasi-equity, through the provision of loan notes and the like).
After that, all that’s really left are alternative credit providers, including US hedge funds, but that model can often leave retailers extremely vulnerable. Not only that, but the cost of capital can again be incredibly high, with some investors looking for returns of 15% or more.
Trying to decide between these various options is a bit like choosing between Scylla and Charybdis – or whatever their financing equivalent might be. Is it any wonder that New Look has hired professional advisers to help with its refinancing strategy?
- Dan Coen, director, Zolfo Cooper