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Matalan downgrade leads to credit concerns

Some of Matalan’s UK suppliers have claimed they are finding it difficult to secure credit insurance amid concerns over the retailer’s plummeting profits in the last quarter.

Matalan’s EBITDA fell 90% to £2.3m in the 13 weeks to August 29 as it was hit by operational problems at its warehouse in Knowsley, Merseyside. The firm made an operating loss of £7.6m for the quarter, compared with an operating profit of £14.7m the year before.

Last month, ratings agency Standard & Poor’s downgraded Matalan’s business risk profile from “weak” to “vulnerable” and its management and governance practices from “fair” to “weak”, noting that this was its second consecutive quarter of falling profits.

S&P said it believed Matalan’s supply and distribution network may be more severely affected than previously thought and the retailer may need more time to restore its earnings capacity.

Sources have told Drapers a few suppliers have been struggling to get cover for Matalan orders since the downgrade.

One suppliers said: “Our credit insurer is going to pull its cover. They have asked us to reduce our exposure to Matalan. We are going to have to justify every order with them.”

He added: “At the moment it’s not a doomsday scenario as they are still making a profit, but we have a strict policy not to work with retailers who don’t have credit insurance. We have to be prudent and conservative in our approach; we have been stung before.”

Another supplier told Drapers: “My credit insurer is not granting cover [for Matalan] at the moment; they have been alarmed by the trading results recently due to issues with the distribution centre and overstocking of spring stock. Manufacturers are worried.”

A source close to the situation said: “People are struggling to get credit insurance against Matalan as a result of the downgrade.”

However, a spokeswoman from Matalan said: “The business has a good relationship with its supplier base, many of whom are incredibly longstanding affiliations of over 30 years.

“Naturally, suppliers are very comfortable with the company’s healthy cash position. And, as is normal industry practice, the company remains engaged in an open dialogue with suppliers.”

Matalan, which is owned by the Hargreaves family and run by Jason Hargreaves as its managing director, opened its first store in Preston in 1985 and today has more than 200 stores in the UK, as well as seven franchise stores overseas.

It moved into the 575,000 sq ft Knowsley distribution centre at the end of 2014.

Moody’s, the other major ratings agency, has not changed Matalan’s credit rating of B3 (stable). Its report, published on October 13, said it was ”clear that the necessary level of discounting was higher than previously expected”.

But it added: “The lower level of profitability leading to weaker credit metrics is a direct consequence of non-recurring issues and we believe that the company will continue to have adequate liquidity.

”We believe appropriate actions have been taken to address the errors in planning the new DC, including an independent review of the project and new senior hires with relevant experience.

”Once the new DC is operating efficiently, profitability should recover in fiscal 2016/17 to levels recorded in the last couple of years.”

S&P downgraded Matalan’s rating in mid-October, not early November as reported in this week’s print edition of Drapers (published November 14). The credit insurance issues mentioned were said to have occurred after that time. We apologise for any confusion.

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