FDs predict further gloom for embattled retail sector

The bleak prospects facing Britain’s high street retailers show no signs of
improving, according to almost three-quarters of the finance directors polled in
the latest Accountancy Age/Reed Finance Big Question.

Asked whether the £7bn merger between Boots and Alliance UniChem signalled
the beginning of major consolidation among retailers, 71% of the 231 respondents
said more mergers were inevitable as the sector struggled to cope with a
downturn in consumer spending.

The results of the survey came as analysts and debt advisers predicted a
challenging few months ahead for retailers, which could see further breaches of
financial covenants and even insolvencies.

Sunita Kara and Nicolas Baudouin, credit analysts at Standard & Poor’s,
warned that consumer caution could place negative pressure on the credit ratings
of non-food retailers.

The analysts said there was ‘little evidence’ that the consumer slowdown
would end before the middle of next year, which could leave companies undergoing
restructuring vulnerable.

‘The continuing slump in retail consumption trends will be most damaging for
retailers that are already challenged by company-specific issues,’ Kara and
Baudouin said.

The analysis said that as competition for customers intensified in the
current climate, companies repositioning themselves would find the going tougher
than their competitors.

Tim Murphy, debt advisory partner at Deloitte, warned that, with a number of
retailers experiencing banking covenant difficulties, the risk of retail
insolvencies was heightened.

‘If covenants are broken, debt is placed on demand, meaning that a bank can
call in that debt. If a company is not able to pay then it is in real difficulty
and facing insolvency,’ he said.

Murphy was also concerned that because debt was syndicated among a number of
lenders and often traded on to other parties companies would find it very
difficult to renegotiate the terms of their loans when in trouble.