The statement ended months of uncertainty surrounding how the group intends to address its upcoming ~£480m maturity wall. The UK-based discount retailer said yesterday that an ad hoc group of first lien holders agreed to push back the maturity of its £350m SSNs due January 2023 by six months and commit £200m of stapled senior secured financing to facilitate a sales process.

One unsurprising bidder is founder and existing majority shareholder John Hargreaves, who has resigned his position as chairman to participate in the auction. Hargreaves returned to his prior role as chairman earlier this summer and was understood to be prepared to inject significant amounts of capital to smooth an amend-and-extend or a refinancing agreement. But the Telegraph subsequently reported lenders wanted him to provide a bigger equity contribution and had pushed for a sales process to establish if there was third party interest.

In a stressed scenario 9fin expects a bricks-and-mortar discount retailer like Matalan to attract a valuation of around 5.5x, based on data from comps such as Hema. A multiple in this range would give Matalan a valuation of £446.5m based on its forecasted fiscal year ending March 2023 EBITDA of £81.3m.

The retailer’s ~£480m debt facilities include £350m First Lien (1L) 6.75% SSNs due Jan 2023, a £50m ABL and a £80m 9.5% Second Lien (2L) secured PIK toggle note due Jan 2024. Proceeds from the sale will have to exceed ~£480m for the 2L to be covered which throws into doubt the fate of the £80m 2L as this would require a significant equity cheque of over £200m to clear the debt.

Hargreaves himself owns a ~£20m stake of the 2L, sources close previously told 9fin. In 2020, as part of prior restructuring, he equitised £50m of his 2L holding to facilitate the deal.

It is unclear for the time being what the 2L holders plan to do as they’ve been kept out of the restructuring talks, the sources close confirmed. One option being considered is for the 2L to team up with a potential bidder in an effort to protect their position. However, this option is yet to be fully explored pending the circulation of due diligence from Teneo.

One further option would be for the 2L group to offer their own staple financing, but this would mean they would significantly have to upsize their ~£60m exposure to around £200m.

Matalan also announced that Nigel Oddy was appointed as interim CEO. Oddy’s CV resembles the A-Z of the last decade’s U.K. retail restructurings as he’s previously held C-suite roles at New Look, The Range, House of Fraser, Furnitureland and Blacks Leisure.

1st class treatment

Following the launch of the strategic sale process, the 1L ad hoc group agreed to extend Matalan’s £350m Jan 2023 SSNs by six months and to provide £200m of senior secured, stapled financing to interested parties. Given the nature of the situation, the £200m stapled financing is likely to be on the expensive side. 9fin expects a low to mid teen coupon - a rough comparison would be Asda 2026 SSNs which currently yield around 12%.

Alternatively in the event of a recapitalisation which will significantly reduce Matalan’s debt (we assume £200m is seen as a sustainable debt figure by the 1L to give an LTV of 50-60%) the ad hoc group will agree to push out maturities from January 2023 to September 2027.

In this scenario, a £200m senior facility in addition to the £50m ABL brings Matalan’s leverage to roughly 3x, which seems reasonable given Matalan’s business model and cash-flow.

Following yesterday’s announcement, the £350m 6.75% SSNs shot up by five points to 79. The notes sank to lows of mid-70s earlier this month from high-90s in January this year as it became clear that Matalan wouldn’t be able to pull off a straightforward refi due to the tricky syndicated markets and a drop in consumer confidence.

The 1L ad-hoc group is working with advisors from Perella Weinberg and one noteholder previously told 9fin that the holder base tends to be quite “clubby” and some have been existing lenders for the last decade, which will help them to figure out something consensual.

Some sources close have suggested that the 1L holders do not wish to own the business and their main aim is to be repaid at par, which is potentially why they offered £200m of stapled financing to facilitate a sale.

It’s also worth noting that by launching a strategic sale, it may be easier to implement a  restructuring using a UK restructuring plan. It would give an indication where the value breaks and make it simpler to cramdown dissenting classes deemed to be out-of-the money.

Recent receipts

Matalan highlighted in yesterday’s release that its Q2 (Fiscal 23 to end August) revenue rose to £286.7m, compared to £264.7m in the comparable period last year and post-IFRS 16 EBITDA dropped to £36.7m from £61m last year.

Liquidity is on the decline as closing unrestricted available cash on the balance sheet dropped to £101.6m as of 27 August 2022, compared to £173m as at 27 August 2021. Factoring in seasonal stock purchases, Matalan expects to close fiscal 2023 with unrestricted available cash on the balance sheet of £65.8m.

The retailer has warned that the outlook for 2023 is subject to a tough macro backdrop. Matalan is exposed to a number of inflationary pressures including shipping market inflation — an increase of £35m cost to the business in fiscal 2023. On the consumer side, rising levels of inflation, particularly with regards to energy and food, is likely to place strain on disposable incomes and discretionary spending.

Matalan clarified in the announcement that it hedged its FX at an average rate of £1/$1.37 vs current spot rate of £1/$1.08 for FY’23. However this hedging will expire in February and could significantly increase costs for sourcing stock which is primarily in dollars, the sources close noted. The discount retailer said in an earnings call earlier this year that it sources around 80% of its stock from East Asia exposing the business to sterling fluctuations and supply chain risk.

Teneo and Clifford Chance are the company’s legacy advisors and the owners, the Hargreaves family, are working with advisors from Lazard and Paul Hastings. The 2L holders have engaged Houlihan Lokey.