(Debtwire) Matalan December sale completion targeted, John Hargreaves bid in the works

28 September 2022 | 16:30 BST

Matalan’s trading update disclosed sale process intentions as refinancing ambitions for the UK retailer appear to be impossible in the current climate. With staple financing support, there remains the opportunity for a competitive auction for the business with a minimum cGBP 410m purchase price required to ensure first lien debtholders are fully covered, according to three sources familiar with the situation. But a proposed bid from founder John Hargreaves will bring most operational benefits, according to a fourth source familiar.

The company on Monday (26 September) announced management changes, while releasing its 2Q22-23 financial results and a refinancing update, noting it has secured an agreement with over a majority of its first lien secured noteholders on the key terms of a comprehensive recapitalisation, as reported.

Matalan is working with advisors Teneo and Clifford Chance while first lien noteholders are working with Perella Weinberg and Kirkland & Ellis. A second lien group is advised by Houlihan Lokey and Freshfields, while the Hargreaves family is working with Lazard and Paul Hastings, several sources noted.

Matalan’s par refinancing ambitions have been thwarted by its large debt burden and UK recession fears. The company’s first lien January 2023 maturities are fast approaching and failure to deal with these would mean first lien holders would effectively take control of the business. The company and a majority ad hoc group of first lien noteholders have therefore agreed to begin a competitive sale process where anyone can bid for the business. There will also be an extension of the first lien secured note maturities by six months to July 2023 to keep the M&A process effective and the first lien ad hoc group will provide GBP 200m of senior secured staple financing to support bids from any interested parties.

The extension of the first lien maturities for six months provides flexibility over the M&A process. It would require 75% noteholder support through a scheme of arrangement or 90% approval in an out-of-court process if any change is made to the maturity of the notes, one source noted. The sale process has already commenced with a bidding and review process running till the end of October, according to the first source. An awarding and financing second phase is planned to end in November with the whole process hoped to be tied up in December, the first source added.

“If anyone sees the asset as attractive then the best option is to bid. It is not exclusive and is an equitable solution,” the first source said. “First lien ad hoc holders are offering staple financing and the spirit is to make the process effective. The winning bid is the highest bid. It is a competitive auction.”

The maturity extension for six months is not “in the bag” and 90% approval is needed to change the terms of the notes and extend, a second source countered. The ad hoc group has only above 50% and not 90%, while there are cross-holders in the second liens which will make it difficult to get 90% approval.

“The business is inextricably linked to John Hargreaves – he supported the Head Office sale and leaseback and has a stake in the second liens,” the second source said. “His son Jason has been involved in sourcing and Matalan suppliers don’t want to work with anyone else. The business will be saved but it will be saved by John Hargreaves,” the second source said. “There are suggestions there is a competitive auction to make John Hargreaves pay more than is rational. He will bid a rational number.”

There is a risk that without the Hargreaves family supplier terms would change materially, the second source noted. “Ultimately there is only one bidder in this process and it is John Hargreaves,” he posited.

If no attractive bids materialise then the company has a fallback alternative recapitalization plan where first lien secured debt maturities would be extended from January 2023 to September 2027 with a lower leverage capital structure. The support of the first lien ad hoc group would mean Matalan would have the required consents to implement the transaction. In this scenario, the first liens would take ownership and second lien debt would be released, the first source noted.

“There has been no change of ownership yet, but the business is up for sale,” the first source said. “Everyone realises there is too much debt in the business, and as it stands, it cannot be refinanced. So, if the maturities are not dealt with the ownership would sit with the first liens.”

If no attractive bids are forthcoming, the fallback would be for the first lien bondholders to take ownership and make the capital structure sustainable with debt maturities then extended to 2027.

“The alternative is a fallback and if the bid yields are not attracting enough interest the fallback sits with the first liens who are the largest in the money stakeholder,” the first source said.

Any bid value of a minimum cGBP 410m size could mean the first liens are covered given there is around GBP 350m of 6.75% first lien secured 2023 notes outstanding and a GBP 60m super senior revolving credit facility provided by capital solutions provider Bantry Bay (see Debtwire analyst capital structure below). The Bantry Bay facility was provided in June, as reported.

The company also had GBP 80m of 9.5% second lien secured 2024 notes and GBP 50m of 9.5% 2024 shareholder notes outstanding as of 1Q22/23 quarter-end 28 May 2022.

“It seemed hard to see a way where the seniors would want to own the company given it is a UK retailer heading into a recession,” a third source noted. “The seniors are refinanceable on their own due to a high equity cushion.”

The Mata Carta

Matalan founder John Hargreaves, who also owns the GBP 50m of 9.5% shareholder notes, intends to participate in the strategic sale process as a bidder, and has stepped down as chairman to concentrate his efforts on the process.

The company has previously commanded a large price-tag. Matalan in 2009 received an approach from CVC to take over the company with an asking price of GBP 1.5bn, according to a press report. Matalan was delisted by John Hargreaves in 2006 for an estimated valuation of GBP 817.2m of which the consideration was met with GBP 408m of debt facilities, as reported.

Some investors estimate the Matalan EV/EBITDA multiple at around 6.5x which would provide a discount versus UK fashion retail peer Next. Applying a 6.5x EV/EBITDA multiple to Matalan’s projected FY22/23 pre-IFRS 16 EBITDA of GBP 81.2m would imply a GBP 527.8m valuation and provide a bid above the cGBP 410m estimated required valuation to cover first lien debtholders, leaving upside for second lien bondholders too in the process.

“Any bid may need to raise an extra GBP 210m to cover the first liens and RCF,” the third source said. “The GBP 200m staple is then the balance.”

The staple financing means that instead of coming up with cGBP 410m of financing to cover the senior debt, any bidder only has to come up with GBP 210m given the staple financing is around GBP 200m, the second source noted. It is a much lower hurdle and the seniors are trying to ensure they get out. The ad hoc group who put up GBP 200m also get fees for that and it is structured to make it viable that any bidder can buy the company, he added.

“There is GBP 200m financing allegedly stapled, [we are] I’m guessing to someone putting in cash, but there is no detail,” independent special situations firm Sarria told Debtwire. “Some GBP 200m is not an awful lot when a GBP 350m bond is trading at 80 cents and would require a very large cash investment. [we are] I’m missing something.”

The prospects of outcomes for second lien bondholders remains unclear. If a sale process does not materialise and the alternative recapitalisation process is pursued, then the second lien noteholders could be released. But they could bid for the company as part of any sale process and if their bid was more than GBP 410m then second lien debt could be taken out with the extra bid proceeds. By bidding more than GBP 410m, it may result in providing additional funds to be divided among second lien noteholders.

“The non-John Hargreaves subs could bid. They are around an GBP 80m piece and at that point who cares if the value breaks in the subs if they own the entire company,” the third source said. “They are then effectively equitizing themselves but paying for it. They would get the entire enterprise value of the company but at a discount.”

The subs can be taken out close to par [on a high bid] but if anyone wins with a bid around GBP 410m then the subs are zero, the third source noted.

“How much debt can you put on a distressed retailer? 2x? Why would the second liens invest even GBP 150m to protect a notional of around GBP 40m (c50 cents on GBP 80m),” the second source countered. “It is never going to happen and is cloud-cuckoo land.”

Hard Mata-landing

Matalan disclosed current trading information alongside the refinancing update. The company’s 2Q22/23 trading for quarter-end 27 August posted quarterly restated IAS 17 EBITDA of GBP 13.1m, down versus GBP 38.9m in the prior 2Q21/22 quarter. Company post-IFRS 16 EBITDA was GBP 36.7m and down versus GBP 61m in the prior 2Q21/22 quarter. Matalan had a quarter-end closing cash balance of GBP 101.6m and unrestricted liquidity as of 26 September was GBP 91.1m.

The company also gave colour on its four-year business plan which aims to deliver pre-IFRS 16 EBITDA of GBP 124m at FY25/26 versus GBP 81.2m at FY22/23 (see chart below). The company’s post-IFRS 16 EBITDA is forecast to grow to GBP 223m at FY25/26 versus GBP 178.3m at FY22/23. Matalan noted that the outlook for the remainder of FY22/23 faces inflation pressures which have placed a strain on disposable incomes and discretionary spending.

Matalan has guided for GBP 40m in annual total capex for FY22/23 but notes annual maintenance capex will be in the GBP 8m – GBP 12m range per year over the upcoming forecasted period.

Current trading is not much of a concern yet, Sarria noted. Cash is weaker than expected and some of it will be down to an outflow of payables, but pre-funding inventory is the big concern, even with Matalan’s cash balance.

“Having two possible options reflects the reluctance in the deal. As long as the company has cash, no-one has to do anything about it and extending the fulcrum becomes your default option,” Sarria told Debtwire. “But it’s really trade creditors who decide how long the company has its cash and they need to know it stays a going concern.”

The company also announced the appointment of Nigel Oddy, the former CEO of UK fashion retailer New Look, as Interim CEO of Matalan.

Matalan’s B3/CCC rated GBP 349m 6.75% first lien secured 2023 notes have been indicated around three points higher since the update announcement and indicated today (28 September) at 78-mid while its Caa3/CC rated GBP 80m 9.5% secured second lien 2024s are indicated 1.5 points down at 50-mid on Markit.

Matalan’s business update released on 21 February was a cleansing statement after a pre-marketed refinancing attempt through Goldman Sachs was put on hold. The postponement was due to a pricing gap and investor reluctance to add sterling consumer exposure ahead of the expected jumbo issuance from UK supermarket chain Morrisons, as reported.

Matalan, the John Hargreaves family, the first lien ad hoc group, Teneo, Perella Weinberg, Kirkland & Elis, Houlihan Lokey, Freshfields, Lazard and Paul Hastings declined to comment.

by Adam Samoon and Warren Thompson with capital structure by Adeline Bockarie