Retail Credit Rating Downgrades
Published date | 21 April 2021 |
Subject Matter | Finance and Banking, Coronavirus (COVID-19), Debt Capital Markets, Financial Services, Commodities/Derivatives/Stock Exchanges, Financing |
Law Firm | Reynolds Porter Chamberlain |
Author | Sukh Ahark and Edward Colville |
How to stop a downgrade becoming a default
What is happening?
COVID-19 disruption and resulting lockdown measures have particularly impacted some retailers. For those hard-hit, signs of declining demand and profit erosion can cause concern for banks lending to them. Other factors such as missed debt payments and renegotiation of rents can affect corporate credit ratings, which could in turn impact retailers' credit facilities.
Why does it matter?
Retailers typically use a range of external funding; from large syndicated facilities and bond programmes, to smaller revolving facilities and overdrafts. They may also use additional banking facilities such as invoice discounting, online payment facilities or guarantee facilities, or utilise derivatives for hedging. It is likely that these facilities were checked at the outset of the pandemic for financial covenants relating to turnover and profits and specific events of default linked to missed payments, store closures etc.
Retailers with existing facilities in place should be mindful of any "rating triggers". Finance documents may include covenants obliging the retailer to maintain a credit rating above a certain threshold. In the event of a ratings downgrade, these covenants could be breached, giving a bank a right to take enforcement action against the retailer.
What action should you consider?
- Know your Facility Agreement - Most covenant breaches will allow lenders to declare a default and to demand early repayment of loans and/or act as a draw-stop, blocking a borrower's ability to draw funds under a facility. The specific types of covenant will vary, so it is important for retailers to examine their finance...
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