Overview

U.K.-based value apparel retailer Matalan has reported seven consecutive 
quarters of earnings growth and announced its intention to refinance all 
of its existing debt by issuing a total of up to £480 million of senior 
secured notes, split between first- and second-lien tranches, and a £50 
million revolving credit facility. 
The successful issue of the proposed notes would enable Matalan to 
stabilize its capital structure through maturity extension, and underpin 
the strengthening of its credit metrics as a result of its improved 
operating performance.
We are therefore placing our 'CCC+' long-term corporate credit rating on 
Matalan's parent, Missouri Topco Ltd., on CreditWatch positive.
We are also assigning our 'B-' issue rating to the proposed £330 million 
first-lien senior secured notes and our 'CCC' issue rating to the 
proposed £150 million second-lien senior secured notes.
The CreditWatch placement reflects our expectation that we would likely 
raise our long-term rating on Matalan by one notch, to 'B-', if the 
refinancing is successful and on terms that are largely commensurate with 
our base case, particularly with regard to total debt and cash interest. 

Rating Action

On Jan. 15, 2018, S&P Global Ratings placed its 'CCC+' long-term corporate 
credit rating on Missouri Topco Ltd., the holding company of U.K.-based value 
apparel retailer Matalan, on CreditWatch with positive implications.

At the same time, we assigned our 'B-' issue rating to the proposed £330 
million senior secured first-lien notes to be issued by Matalan Finance PLC, 
the group's financing vehicle. The recovery rating on these notes is '3', 
indicating our expectation of meaningful recovery prospects (50%-70%; rounded 
estimate 65%) in the event of a default.

We also assigned our 'CCC' issue rating to the proposed £150 million 
second-lien senior secured notes to be issued by Matalan Finance PLC. The 
recovery rating on these notes is '6', indicating our expectation of 
negligible (0-10%; rounded estimate 0%) recovery prospects in the event of a 
default.

We placed our 'CCC+' issue rating on the existing £342 million first-lien 
senior secured notes issued by Matalan Finance PLC on CreditWatch positive. We 
revised our recovery rating on these notes to '3' from '4', indicating our 
expectation of meaningful recovery (50%-70%; rounded estimate 65%).

We placed our 'CCC-' issue rating on the group's £150 million senior 
subordinated second-lien notes (of which £138.0 million remains outstanding) 
on CreditWatch positive. The recovery rating is unchanged at '6', indicating 
our expectation of negligible (0-10%, rounded estimate 0%) recovery in the 
event of default.

The ratings on the proposed issues are subject to the successful completion of 
the transaction, including receipt of the final documentation. If the 
refinancing transaction does not complete or the scope of the transaction 
departs materially from the current plan, notably regarding the anticipated 
coupon, we reserve the right to withdraw or revise our ratings.

Rationale

The CreditWatch placement reflects the likelihood that we could raise our 
long-term rating on Matalan by one notch if the group successfully completes 
the proposed refinancing on terms commensurate with our base case. In 
particular, we anticipate that the transaction will result in no significant 
changes in total debt and cash interest burden. We expect robust operating 
performance of recent quarters will continue in the next few years, and we 
would therefore consider Matalan's capital structure as sustainable when the 
transaction is completed. At that time, after the current senior secured notes 
have been fully repaid, we would likely raise our long-term rating on the 
group to 'B-' from 'CCC+' and withdraw our ratings on the retired debt.

This refinancing transaction follows a material improvement in the group's 
operating performance over the past seven quarters. For the 12 months to Nov. 
25, 2017, Matalan reported EBITDA of £102 million, compared with £77 million 
generated in fiscal 2017 (ended Feb. 28, 2017), outstripping all EBITDA 
numbers posted in the past five fiscal years. This improvement reflected the 
benefits from the measures Matalan implemented over the past two years, aimed 
at raising the efficiency of its operations, honing its merchandising 
strategy, and rolling out its store refurbishment program. As a result, 
Matalan has significantly improved its underlying free operating cash flow 
(FOCF) generation. For example, in the same 12-month period, the group posted 
reported FOCF of £16.5 million, accounting for the £33 million acquisition of 
the company's head office (about £49 million excluding this exceptional 
spending). This compares with £16.0 million reported in fiscal 2017.

We believe this solid performance, alongside Matalan's market share gains in 
U.K. apparel in recent periods, including trading in the run-up to Christmas, 
demonstrates the group's greater resilience to tough market conditions than we 
had previously anticipated and has prompted us to revise up our business risk 
profile assessment to weak from vulnerable. 

At the same time, we forecast broadly stable credit metrics because the 
proposed refinancing is not accompanied by any meaningful deleveraging. 

Our rating on Matalan is constrained by the group's exposure to the 
price-competitive value retail clothing market, exacerbated by concentration 
in the U.K., where demand for discretionary goods will continue to face 
challenges. It also reflects Matalan's relatively high financial leverage, 
with S&P Global Ratings-adjusted debt to EBITDA of 5.5x-6.0x over our forecast 
period through the end of fiscal 2020. This includes the capitalization of 
Matalan's operating leases, which are high compared with those of peers. This 
reduces the flexibility of the group's cost base and increases its adjusted 
leverage. As such, we forecast rent-adjusted cash interest cover (EBITDAR to 
cash interest plus rents) will remain relatively low, at 1.4x-1.5x over our 
forecast period to the end of fiscal 2020. Matalan's financial flexibility is 
also limited by near-term pressure on cash generation, owing to exceptional 
items, namely the £33 million acquisition of the group's headquarters and 
onetime refinancing costs in fiscal 2018. 

On the upside, fashion trends are less important in the value segment than in 
the higher-price segments of the apparel industry, which supports Matalan's 
operating efficiency. Matalan benefits from a wide store network across the 
U.K., diversification into menswear, kids wear, and homeware, and from broad 
reach of its customer loyalty program, allowing direct contact with its 
customers. Compared with other value retailers, Matalan benefits from its 
well-established and growing online presence, enabling it to boost sales 
growth.

In our base case, we assume:

Refinancing to go ahead as planned, extending debt maturities and 
improving the group's liquidity position.
More modest GDP growth of 1% in fiscal 2018, versus the 1.5% we 
anticipated in our July 2017 base case, with a pick-up to 1.3% in fiscal 
2019. 
Sales to slightly outpace GDP growth, advancing to 2.5% to 3% in fiscal 
2018 to about £1,070 million, with a further increase of 2% to 3% in 
fiscal 2019. We expect this top-line growth will follow moderately 
positive like-for-like trading in U.K. stores, supported by inflationary 
pressures and the moderately defensive nature of Matalan's low-ticket 
offering, but limited by a U.K. retail market that we expect will remain 
challenging as the squeeze on real disposal incomes accelerates. We also 
anticipate that online sales will contribute to more than one-half of the 
group's overall growth in fiscal 2018. 
Gross margin contracting moderately to 49% in fiscal 2018 from 51% in 
fiscal 2017, thanks to the group's ability to sustain a high level of 
full-price sales and extend its product mix toward higher-margin ranges. 
We expect a deterioration in 2019, stemming from a more discount oriented 
market and further weakening of the sterling-dollar exchange rate.
S&P Global Ratings-adjusted EBITDA margin of 19.5% in fiscal 2018, 
narrowing to 18.5%-19% in fiscal 2019 (after 17.2% in fiscal 2017 and 
14.1% in fiscal 2016). 
A slight working capital inflow in 2018, thanks to a onetime calendar 
effect, with a moderate outflow subsequently, related to the development 
of new product categories and building up of inventories.
Excluding the acquisition of Matalan's headquarters, we expect capex in 
the £35 million-£40 million in fiscal 2018, moderately increasing 
thereafter to about £45 million per year, primarily to fund store 
refurbishment and the group's internal systems. 

 
Based on these assumptions, we forecast the following credit metrics for 2018 
and 2019:

An adjusted debt-to-EBITDA ratio of 5.9x-6.5x.
Adjusted funds from operations (FFO) to debt of 5%-10%.
EBITDAR to cash interest plus rents of about 1.4x, improving to 1.5x in 
fiscal 2020.
Positive reported FOCF (excluding our adjustments) of about £12 million 
in fiscal 2018, including the impact of the acquisition of the group's 
headquarters, with neutral to moderately negative FOCF in fiscal 2019.

Liquidity

We consider Matalan's liquidity position, before the planned refinancing, to 
be adequate. We expect this position will be maintained once the proposed 
refinancing is complete. After the proposed refinancing, Matalan will benefit 
from extended bullet maturities of its financial obligations, thereby 
supporting a cushion for the group's liquidity in case of any operating 
setbacks, including any related to the implementation of management's 
turnaround plan. Moreover, we assume no dividend distribution. 

Post refinancing, we expect sources of liquidity will exceed uses by about 2x 
over the ensuing 12 months, assuming the £50 million RCF is fully available, 
apart from the £12 million already used for letters of credit and guarantees 
that we expect will grow to about £16 million in the next fiscal year, 
reflecting the continued growth of the business. Matalan's liquidity will 
further benefit from the absence of financial maintenance covenants, provided 
the RCF is less than 35% drawn (equivalent to £17.5 million). 

In the 12 months following the refinancing, we estimate principal liquidity 
sources as:

Cash balances of £83 million, which accounts for cash trapped in tills 
and subsidiaries that we estimate at around £1.5 million and that we 
consider as not immediately available;
Forecast FFO of about £55 million in fiscal 2018; and
£34 million available under the RCF, based on our view that Matalan would 
pass its covenant tests if it drew down on the facility beyond the 35% 
threshold at which the covenants spring.

 
Principal liquidity uses are:

Capex of £37 million-£42 million; and
Working capital outflows (including intrayear seasonal peak-to-trough 
requirements) of up to £55 million.

CreditWatch

We aim to resolve the CreditWatch when the proposed refinancing is complete, 
and we have reviewed the final terms of the transaction and the final debt 
documentation.

We will likely raise our long-term corporate credit rating on Matalan to 'B-' 
if it successfully completes the refinancing, repays the existing notes, and 
extends its debt maturities, on terms that are generally in line with what we 
anticipate, such that there are no significant changes in total debt and cash 
interest burden compared with the current capital structure.

Failure to implement the planned changes to the group's capital structure or 
any significant delays in implementing them would likely prompt us to affirm 
our 'CCC+' rating on Matalan. We could affirm the rating if the final 
transaction terms differ materially from our base case, in particular if our 
expectation of reported FOCF or our EBITDAR coverage ratio are weaker than 
anticipated in our current base case, for example, because of a higher coupon 
rate.

Ratings Score Snapshot

Corporate credit rating: CCC+/Watch Pos/--

Business risk: Weak

Country risk: Low
Industry risk: Intermediate
Competitive position: Weak

 
Financial risk: Highly leveraged

Cash flow/leverage: Highly leveraged

 
Anchor: b-

Modifiers

Diversification/portfolio effect: Neutral (no impact)
Capital structure: Neutral (no impact)
Liquidity: Adequate (no impact)
Financial policy: Neutral (no impact)
Management and governance: Fair (no impact)
Comparable ratings analysis: Neutral (no impact)

Recovery Analysis

Key analytical factors

Our issue rating on the proposed £330 million senior secured notes to be 
issued Matalan Finance PLC is 'B-', with a '3' recovery rating (rounded 
estimate: 65%). The recovery rating is supported by the limited amount of 
prior ranking liabilities, notably the super senior RCF.
Our issue rating on the proposed £150 million senior secured notes to be 
issued by Matalan Finance PLC is 'CCC', with a '6' recovery rating 
(rounded estimate: 0%). The recovery rating reflects the notes' 
subordination to the £330 million senior secured notes and £50 million 
RCF.
The issue rating on the existing £342 million senior secured notes issued 
by Matalan Finance PLC is 'CCC+', with a recovery rating of '3', 
indicating our expectation of meaningful recovery prospects in the event 
of a default (rounded estimate: 65%). We expect to withdraw these ratings 
when the proposed transaction closes and the facilities have been repaid.
The issue rating on the existing £150 million senior secured notes (of 
which £138 million remain outstanding) issued by Matalan Finance PLC is 
'CCC-', with a recovery rating of '6'. The recovery prospects for the 
notes remain at 0%. We expect to withdraw these ratings when the proposed 
transaction closes and the facilities have been repaid.
In our hypothetical default scenario, we assume that an economic downturn 
in the U.K. brings will stoke price competition, combined with a spike in 
raw material prices that the group would be unable to pass on to 
consumers.
We value Matalan as a going concern, given its brand recognition and its 
comprehensive store footprint in the U.K.

Simulated default assumptions based on the proposed refinancing

Year of default: 2021
Jurisdiction: U.K.
EBITDA at emergence: £56.2 million (minimum capex at 2% of annual 
revenues, based on future expectations; standard cyclicality adjustment 
of 5% for the retail and restaurants industry; no operational adjustment)
Implied enterprise value multiple: 4.5x (compared with a 5.0x anchor 
multiple for the retail industry)

Simplified waterfallunder the proposed capital structure

Gross enterprise value at default: £295 million
Net enterprise value after administrative costs (5%): £280 million
Priority claims: £44 million (1) (2)
First-lien secured debt claim: £342 million (1)
--Recovery expectations: 50%-70% (rounded estimate: 65%)
Unsecured debt claim: £157 million
--Recovery expectations: 0%-10% (rounded estimate: 0%)

 
(1) All debt amounts include six months of prepetition interest. 
(2) Includes RCF assumed 85% drawn at default.

Related Criteria

Criteria - Corporates - General: Recovery Rating Criteria For 
Speculative-Grade Corporate Issuers, Dec. 7, 2016
Criteria - Corporates - Recovery: Methodology: Jurisdiction Ranking 
Assessments, Jan. 20, 2016
Criteria - Corporates - General: Methodology And Assumptions: Liquidity 
Descriptors For Global Corporate Issuers, Dec. 16, 2014
Criteria - Corporates - Industrials: Key Credit Factors For The Retail 
And Restaurants Industry, Nov. 19, 2013
Criteria - Corporates - General: Corporate Methodology, Nov. 19, 2013
General Criteria: Country Risk Assessment Methodology And Assumptions, 
Nov. 19, 2013
General Criteria: Methodology: Industry Risk, Nov. 19, 2013
General Criteria: Group Rating Methodology, Nov. 19, 2013
Criteria - Corporates - General: Corporate Methodology: Ratios And 
Adjustments, Nov. 19, 2013
General Criteria: Methodology: Management And Governance Credit Factors 
For Corporate Entities And Insurers, Nov. 13, 2012
General Criteria: Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' 
Ratings, Oct. 1, 2012
General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009

Related Research

Credit Conditions: EMEA Sector Roundup: Trends And Emerging Risks 
December 2017, Dec. 5, 2017 
Credit Conditions: Hope Overcomes Fears As The Fundamentals Propel Europe 
Forward, Dec. 5, 2017 
Industry Top Trends 2018: Retail and Restaurants, Nov. 14, 2017
Credit FAQ: How Many Retailers Around The Globe Will Survive The Sector's 
Structural Changes?, May 5, 2017

Ratings List

CreditWatch Action
                                        To                 From
Missouri TopCo Ltd.
 Corporate Credit Rating                CCC+/Watch Pos/--  CCC+/Stable/--

Matalan Finance PLC
 Senior Secured                         CCC+/Watch Pos     CCC+
   Recovery Rating                      3(65%)             
 Secured Subordinated Debt              CCC-/Watch Pos     CCC-
   Recovery Rating                      6(0%)              

New Rating
Matalan Finance PLC
 Senior Secured                         B-                 
   Recovery Rating                      3(65%)             

 Secured Subordinated Debt              CCC                
   Recovery Rating                      6(0%)              

Certain terms used in this report, particularly certain adjectives used to 
express our view on rating relevant factors, have specific meanings ascribed 
to them in our criteria, and should therefore be read in conjunction with such 
criteria. Please see Ratings Criteria at www.standardandpoors.com for further 
information. Complete ratings information is available to subscribers of 
RatingsDirect at www.capitaliq.com. All ratings affected by this rating action 
can be found on the S&P Global Ratings' public website at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.  Alternatively, call one of the following S&P Global Ratings numbers: 
Client Support Europe (44) 20-7176-7176; London Press Office (44) 
20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm 
(46) 8-440-5914; or Moscow 7 (495) 783-4009.