Retail restructuring specialist GA Europe and IFT Fellow Pelham Allen have developed an innovative short term stock financing solution, adding to GA Europe’s existing funding capability. Jane Hughes, GA Europe Investment Director outlines how GA Europe can help retailers to plug the funding gap.
The funding challenge facing UK businesses may be a well-covered debate, but the situation shows little sign of any real improvement. According to Bank of England figures, total business lending fell 4.4% to £4.8bn in the three months to February with lending now having fallen in 21 of the last 23 months. Whilst demand side factors are part of the problem, particularly from small businesses looking to batten down the hatches and pay down existing debts, supply-side initiatives have done little to alter the status quo. The Funding for Lending Scheme, for example, seems to have failed to gain any apparent traction. Far from it, some banks have been actively managing down their exposures in certain situations. Admittedly these have tended to be stressed cases, but nevertheless it’s difficult to believe that Stephen Hester’s recent assertion of RBS being desperate to lend £20bn of spare cash, is entirely representative of the bank funding climate.
The net result is that many businesses are hamstrung, at best unable to drive forward recovery, at worst at risk of descending into zombie status or even further. In terms of this funding challenge, the retail sector is arguably more exposed than others. Not only has continued poor trading piled on the pressure - the sector has borne the brunt of the consumer’s malaise with both consumer confidence indices and sector like-for-likes bumping along the bottom of the trough, way off their 2007 peak. Retail also has more than its fair share of highly leveraged private equity backed businesses, many of which face a refinancing hump in 2014. And with additional pressures at different parts of the trading cycle ie peak funding usually being required following the Easter trading period until the autumn/winter cash starts flowing in October or November, it’s no surprise that funding challenges are often near the top of many retailers’ agendas.
Against this backdrop, innovative solutions are undoubtedly needed to bridge the retail sector’s funding gap. Asset-based lending continues to increase in popularity – according to figures from ABFA, finance secured specifically against stock (as opposed to other asset classes) was 20% higher across all sectors at the end of 2012 than in 2011. The retail sector currently accounts for only a tiny fraction of this and whilst recognising the inherent challenges of ABL in retail such as retention of title issues relating to stock, we believe that the market will grow significantly. It certainly represents a market which GA Europe is looking to tap into, backed by our US sister company GA Capital.
Whilst in the main, asset-based lending facilities are typically £10+m, we also think there is a market for smaller niche asset-backed funding solutions, which are able to sit alongside existing debt structures. In conjunction with IFT Fellow Pelham Allen, GA Europe has developed such a financing solution – a short term top-up financing facility, secured against stock but which doesn’t cut across existing debt funding or security. Put simply, a special purpose vehicle is set up to acquire stock which is sold on to the trading company on a consignment basis. The SPV services the loan and meets the associated costs.
Commenting on the funding facility, Pelham Allen said, “This solution has the potential to enable a retailer to acquire new season stock when extended supplier terms are not available, existing facilities are inadequate and renegotiation of facilities with existing lenders is either impossible or unattractive. As such, it can keep a retailer in business and still under the control of its shareholders, despite seasonal funding pressure.”
Whilst we see this type of short term stock financing capable of plugging one of the funding gaps in retail, it represents just one example of GA Europe’s broader funding capability. Primarily an investor in distressed retail, we previously supported the MBO of footwear retailer Shoon out of administration in May last year by providing funding for working capital as well as taking an equity stake.
Separately, we have been involved in numerous insolvent retail situations, working alongside the Adminstrator to trade the business and potentially funding the purchase of new stock. One such situation was Game, which went into administration in March last year. As Joint Administrator Mike Jervis of PwC commented following the successful sale of the business to Opcapita, “GA Europe’s commitment to buy new stock would have been a vital factor in keeping the business going and in a saleable state, had there been a requirement to trade in administration for any longer.”
With further restructuring of UK retail expected to be at more modest levels than in 2012 and the early part of this year, we’re expecting an increasing proportion of GA Europe’s capital to be put to use helping retailers meet their funding needs on a relatively short term basis, where an innovative and flexible facility is required. Parts of Europe, on the other hand, represent an entirely different proposition. For example, having recently expanded into Italy, it’s clear that a much more fundamental workout approach will be the order of the day.