After the recession, banks are once again starting to take a more flexible approach to providing retailers with lending facilities
Why are we talking about it now?
The recession led to credit drying up or tougher lending terms for many retailers. There are signs now that store groups - including some that suffered most during the downturn - are increasingly able to access credit and hold or improve terms.
Electricals group DSGi recently disclosed it had signed a new £360m revolving credit facility, which brings greater financial flexibility. The retailer can extend the facility, which matures at the earliest in August 2012, under certain conditions.
DSGi said the covenants are “substantially” the same as for its existing arrangements and represents improved flexibility at the “appropriate level”.
But one swallow doesn’t make a summer…
Other retailers have successfully amended their banking arrangements. For instance, JJB Sports, which came close to collapse, modified its deal with the Bank of Scotland in March.
The changes meant that covenant tests were based on current and future trading rather than information from 2009/10. JJB said the new arrangement would bring more flexibility. However, it paid £125,000 for the changes.
So is it business as usual again?
The banks won’t throw good money after bad, so retailers will have to show they have successfully adapted to conditions in order to secure finance.
DSGi chief executive John Browett pointed out that his company’s improved performance and self-help measures gave banks confidence. “We’ve made fantastic progress and they’ve seen that. We are back to a more normal situation,” he said.
What matters when retailers are negotiating with banks?
Alix Partners director Nick Bradley, former head of retail at RBS UK Corporate Banking, says that after the intense short-term pressure over the past couple of years, banks are once again starting to take a medium-term (three-year) view.
However, that means that retailers refinancing in 2010 would need to do so again in two years’ time in order to comply with audit sign-off practice. Therefore, retailers should push for four-year deals.
Companies should be able to demonstrate consistent management of earnings and cash flow. That means effective control of stock, creditors, overheads and costs.
While new facilities can still be difficult to arrange, extension and amendment of facilities by banks’ existing customers is more likely to be looked on favourably.