Is Britain’s High Street Going Broke?

to regularly, but sadly it's now closed. There's a few people that I can see just shopping in argus. They're probably getting some more essentials. I need to pick up some coat hangers at some point. So I'm just outside Paper Taste, which is a shop that sells everything from cards to sparkly pens to fancy photo frames. So there's a big yellow sign saying all dark reduced, and when we peeped through the window, it says twenty percent off pretty much everything that's much. So I've just walked into

Paper Chase. I'm having a look around. Oh my gosh, Peter Rabbit birthday invitations and it's off one fifty. So I'm carrying on walking down Poultry Street. I need to go and get a gym top. Actually, so I've just entered one ne change the shopping center near our office. Well, Hugo Boss is empty and then Espresso pretty much empty.

I'm just in a very popular athletic shop here in the city and I was looking for a top to play my tennis match in trying to find a top in a different size, so I'm just gonna have to ask the lady. So ironically, I just had to leave Sweaty Betty because I couldn't stand in the queue any longer waiting to get another size top. And that's because it was just too busy. So maybe some stores are

weathering the storm. So Dave and Francine, I hope you've enjoyed my on the ground reporting and got something out of it, because I didn't. I'm David Merritt's and I'm Francing Laquax and this is in the City, Bloomberg's podcast, connecting you to the stories and the voices at the heart of the City of London. Now this week we talk shopping and distress. It's not an easy time is

it Francine on the British High Street. I mean you walk around here outside there are empty shops, they've been empty since the pandemic, but no one's taking the space. It's not just here, it's all over London. Yeah, I don't know how many people actually come to the City of London shop, but it is I guess, a good barometer on whether people are so come back to the office.

So I wonder whether this is distressed companies, under stress retailers, or whether we shop differently selfages have got that few neon sign outside saying what does it say? We've got to reinvent how you change the way we shop? And yeah, there's a lot of footfall down Oxtor Street, but there's still those empty stores, those big flagship buildings like Debenhom's, like House of Fraser that no one wants to take over.

And it's all about the economy, with of course the cost of living crisis, higher interest rates, the Hyacinths two thousand and seven and inflation hitting a lot of consumers that maybe would have you not thought twice by buying two or three codes exactly, And it just feels like it's possibly worse here than anyone in the We know

the economic headwinds are everywhere. But you know, we've had the report about the British economy bearing worse than all the G seven this year and companies are in distress. We've got a new newsletter out, so that's exciting. This is a new Bloomberg newsletter which everyone needs to subscribe to,

The Brink. The Brink, and it's called that because this is what companies are facing right There's a big debt cliff that everyone's looking at and who's going to be the next me, the big high Street name to fail. That's what everyone's talking about. The brink. It kind of fills me with dread. So to unpack all of this, we're joining the podcast studio by your UK Retail reporter Katie Linzel and Juliette More Poorer Go European Credit and High Yield and Distressed Reporter, So thank you both for

joining us. So, Katie, how bad is it? Well, it depends which part of retail you look at, but it's not looking very comfortable, let's put it that way. So many retailers are hoping that over the course of this year things will get better, you know, inflation will start to ease off a bit. But really we're saying it's it's pretty tough. And for example, if you look at the online only fast fashion retailers, they had some very

bumpy performance over Christmas. Of course, they will also faced by postal strikes, so that made it much harder to get items out to customers a source for example, if you'd take them as an example, they are looking at a loss for the first half and promising a lot in their second half performance and they have debt coming due next year. So yeah, there are many names we can look at that it's it's a bit painful at

the moment. I mean we spoke before Christmas, didn't worry about what the outlook might be, and then was a kind of in now is it across the board? Has it been a bad season for the retailers in Britain? So volumes did actually fall at Christmas, it was only a minor fall, but still that's something that a lot of people are looking at because when you look at the sales figures, a lot of retailers are coming through

and saying sales are they have grown. The supermarkets in many cases of saying we had record sales and approach to Christmas. But this is inflation that's pumping up sales figures. You know, we're paying more forgetting less at the moment. So yeah, I think it is looking very tough. And Christmas was a bit better than than many observers expected. But at the same time, we've seen a lot of consumers leaning on debt. They're using buy and our pay

later to make some of those purchases. It's not the most comfortable position to be in going into three And Julia, how is this translating into the health of these companies? Are we seeing heightened levels of distress when we look at the debt a lot of these companies if your demand demand from your consumers is lower and if your

costs are going up. Because we have to think about retailers like apperl stores, supermarkets, they'rely in lingalso with things like higher staff costs, have higher energy bills, so you've got like a combination that leads to them generating fewer profits and fewer cash to just pay interest on their debt. And that's particularly an issue when companies have a heavy debt structure, which is what a lot of these retailers, especially in the UK have built over the last years.

You know, supermarkets that are loaded up with billions and billions of that. Like, as soon as you start generating a bit less cash, it becomes a problem to keep servicing these heavy debt structures. But what are they focusing on? So is it are they just trying to preserve market share at the moment or are we finding ourselves that because of leverage in the past, an interest rates going higher, there's just retailers that are going to go bust because

they can't afford it. I think the focus is on, you know, just staying afloat in terms of operations and retaining the market share they have, but also on the death side is really trying to lower that that structure if they can. A lot of them are doing as it sales for instance, it's not exactly a retailer. One company that comes to mind is a stone Gate pub Bloomer reported that they're selling over a thousand pubs. The thing that they're trying to do mostly is really trying

to refinance their deb if maturities are approaching. But that's increasingly challenging and increasingly costly, and as an that investor, you want to be selective when it comes to which credit you're going to be investing in. So you look at the retail sector and think, oh, well, maybe this

is not for me. I'm gonna go with something that's less consumer e supposed because we are in a high inflation recessionary environment, so a lot of them are not able to access capital markets like they used to be, and therefore the they have to seek emergency funding and that's um and if they find it, because if they don't find it, it's probably gonna head for insolvency. We've seen many of them on able to meet their maturities and having to start talks with creditors. One example is Matalanda,

discount retailer. They just got taken over by funds because they were not able to refinance their bonds that were doing January, and they were not able to sell the company because no one was offering enough for it. It sounds like a pretty bleak situation. You know, people are not able to refinance this debt. You mentioned the word was actually you know, we were in a recessionary environment.

You said, I mean historically a recession means disaster for the high street, right for retailers is that what many of them are experiencing. Now, o Katie's are we are we deep in recession in Britain. Well, we've seen plenty of insolvencies lately, right. I think it was this week that paper Chase came to lighten. Yes, but one is boarded up downside. Yeah, so Testco overstepped into buy paper Chase. But that means the brand, That means the I P. That does not mean the stores or the employees. And

how many stores is that? Well, it's many, yeah, it's hundreds. Um and um. Also late last year we saw Jewels going too insolvency made dot Com. Both of those were bought by Next. But again this is not the case of stores being kept or loads of jobs being kept. Um. So there are some opportunities for the for the big retailers who are playing the game correctly. Next and also

phrases Mike Ashley's Empire, they're doing quite a lot of buying. Um. But you know, in the UK in recent years we've seen quite a few retailers go under and I think we're in that pattern. You know, it's it's not disappeared. Um. The retailers have really struggled to survive during the pandemic and now we've got across a living It's a pretty painful double whammy. I mean, no retailer is created equal.

So is it is it the bad retailers? Like is it the retails where people don't sharp that girl bust? Or could it be a healthy retailer that just can't get up front of, you know, some of the financing that they need to deal with. I think it's definitely the l fy ones and with a healthy capital structure are going to be able to weather the storm. It's more a matter of really how levered your capital structure is and what's really your appeal to consumers in this time.

You know, we're seeing a lot of mid range retailers being squeezed, for instance, and those are probably, you know, if combined with a lot of that are going to be the ones that struggle the most in the grocer space, the names that everyone is looking at as then Morrisons, which are kind of in the mid range when it comes to which consumer base they target, they are losing clients to supermarkets like Aldi and Liddle because people are trying to shopper a bit cheaper and both as the

Morrisons have billions that that that were loaded on them as they were the object of leverage buyouts at a time when valuations were so high. Now it looks like their value and the market share that they have is going down and they have these, you know, billions of that that they need to service. So investors are particularly concerned about those types of names in the middle. I would say, so all of those deals that were donswer leveraging up these companies that happen for you in years

with very low interest rates. Obviously thanking them put up rates to four. There's possibly more to come until those have peaked. Who's feeling the pain from all of this? Which investors are really hurtic. What is going to be the fallout from h these deals not being able to be refinanced. I mean definitely, if you're a junk that investors that has piled money into these deals, you are worried about seeing the bomb prices moving down and you're

worried about not being able to refinance. On the other hand, if you are a distressed investor and you're looking at these bomb prices going down and you're thinking, Okay, this company is not going to be able to um access capital markets, it might be an opportunity for them. They might step in by the that and if a solution is not found, kickoff negotiations with the company and eventually

take it over for a very cheap price. So there's opportunities for invest Definitely opportunity Exactly, you need to be able to digest a lot of risk. I guess how's I mean, how's luxury doing. It's been a huge growth sector. But I mean the Chinese luy luxury want what the Chinese coming it up post? But how how is the luxury doing in writin and also across Europe? Luxury is

broadly doing much better. I mean we should be looking at sort the luxury and the budget and the retail as being the sort of strong form either pole basically sort of very cheap or luxury. Yes, and so people you know, they're still buying their luxury handbags. I mean that there are we should remember there are those who aren't so touched by the cost of living crisis, right,

and they can keep buying um. But yeah, generally the picture with luxury in the UK is that we want the Chinese business bag and we want the sort of v Yes, but I think that's not until a bit later in the year. I think it's a bit early to say that right now. But yeah, I was speaking to Harrod's recently, for example, and they are very much looking forward to this later in the year. So who's

the squeeze middle, Like, where's John Lewis? John Lewis, I mean, they're in a bit of a rocky position right as a department store with still still so many stores across the UK. Um, And I mean they didn't didn't actually have to report on their Christmas performance, so we'll wait and see. Um. John Lewis do sort of lean heavily on the fact that they there's this word that comes up in retail which I don't really love, but omni channel. So this idea that the retailer can reach you at

home in store. Um. Of course they have a tie up with wait Rose for their deliveries and returns and things. So um, see John Lewis, I think the jury is out. We will see how that goes. Can I do a poll? When's the last time you were in store? Dave? You know what? I went into John Lewis the other day, but actually only to return a broken product that when's the last time you were in store? Kidding to purchase or just browsing? Um, I don't even know. I bought

online the other week, does that this week? Probably everything on Amazon were last time I think like two three weeks ago. Okay, so you're like the outlier. But you know we're changing. We just don't go to stores really anymore. And this is the time of year as well, you know January February or the post Christmas gloom. You know, why why would we be the stores as much as we did during that that run up to Christmas? So it's it's a tough time. I think Dave went to

talks for a Street and was shocked. He's never doing Christmas too many people feel a lot of people but no, you know, but well they're actually buying anything, the question. People are swarming to these areas, but I don't know they're actually transacting anything. Yeah, I mean retail is still a very popular sort of leisure activity. Right, So we've since the pandemic, we've seen online come back. As as we were discussing, you know, it hasn't been the boom

that people were hoping. So there is more footfall to stores, but how much purchasing is happening is as yet to be seen. Do you know how we stacking up in Britain versus the rest of the world. I mean, we've heard about the r F say Britain is going to be the only G seven country that's going to contract this year. Are we to we you know, we love talking ourselves down in Britain. We are we worse in terms of the debt situation, in terms of the forecast

for these retailers than there for us. Well, I have to say that it's not lookingly exactly good, especially when compared to the rest of Europe. The British high street is extremely extremely leveraged because it's a bigger sector and it's been the subject of a lot more leveraged buy out private equity firms. I've been targeting British retailers um for a long time and it's just not been the same level of transactions when it comes to the other

European markets. But that means that they're more leverage and therefore when you start having less generating less cash, but you have these heavier death structures, and I mean that's going to be more of an issue in the UK than annyone see Europe. The other thing is that inflation as obviously hit the UK the artist especially vers years on for instance. So yes, it's not looking exactly good. But the US is in a similar situation as well.

In the US we've seen a lot of big retailers, um nearing the brink of bankruptcy, I mean bad path and beyond we're expecting it to file within days. So that's I went into a bath and beyond. There you go. It's enormous on Sect Avenue. And that was the only persident. What were you looking for? I was looking for a mop. You're killing the dream you are killing. I didn't find a dream, by the way, so then I walked out and a half and ordered one on Amazon. There we go,

There we go. Disclaimer disclaimer, Um, Katie, I guess the you know, as long as the labor market holds tight, so people will consume less. But the labor market is so tight in the UK because they can't find the staff that you could see maybe more of a pickup in consumer spending quicker than we think. Yes, And the key thing is you job numbers, people keeping their jobs. Um, So yeah, I think for example, whenever you talk to

next Simon Wolfson. Next, there's these are the things he's looking at that we can keep employment high in the UK, then we can keep people spending to some extent um. And this year is going to be interesting one because it should be one of transformation, right, that's what we're hearing from the inflation figures. But later in the year we should really see purchases pick up again. So so we'll see what happens. But bath and Beyond, I mean, do we have any companies like this that could go under?

I feel like the Brits are very much into their d I y and bathrooms. Yeah, I think in the UK will really like I mean the size and scope of bad bathroom beyond Like probably the thing that comes to closest is the supermarkets and that's what investors and the people in the credit community are really keeping their eye on at the moment. So we'll see how they

weather the storm. And when you look at the debt pricing and what's happening in the in the markets where the warning signals is it is it's around the sup some of those bonds trading at really alarming levels. They are they are, I mean, especially when it comes to the UK. We've really hit the lows in September October, around the time when the market crisis tem from the mini budget really affected the British markets. But now they've recovered a little bit, but the ones that people are

worried about are still trading at deeply distressed levels. I feel like everyone, like everyone I know and their mother and their cousin and their second cousin removed, has been to the power Battersey power station. So are we sharping? Are we expecting now an experience? So it's it's not sharping malls somewhere where you go and eat and maybe brows instead of you go to a shop with a purpose. Yeah,

it's all about experience now. So as we've been discussing, you know, we've seen so many retailers boarded up and what retailers really want to have as some fantastic restaurants and bars and cafes right next to their store. Um, we're also seeing, for example, retailers bringing services and experiences into store. So for example, jim Shark, the fitness brand, opened up their new store on Regent Street not that lago, and they have I think it's called the sweat Room.

Actually which is quite sort of visual, but they offer fitness classes inside the store. Um and this is really too sort of promote what my daughter did last weekend. She had a birthday party at Westfield, not to shop, but to do roller roller booting with the kind of sort of house music. And they get them all in there, and there's and it's packed sold out for weeks this place. And then when you're there you might then go into

Zara or you might do something else. But that is the reason, that's the only reason to go to We'll go to cinema or go to check out the restaurants. Yeah, it's it's got to be in experience with all of these these items on offer. Really, and so how does that change the shopping centers? Actually, I mean how does it change or we can see more shopping centers and empty high streets. Well, hopefully those sites that are vacated by the retailers will be taken by the likes of

restaurants and bars. And for example, Julie, I think you're mentioning McLaren as well. You know, we're seeing all these brands we wouldn't expect to see on our high street that range rover Land Rover whoever it might be at Tesla I think have have a store in brent Cross, so you know it's this idea of trying to get shoppers in to check out the cars, maybe also have an experience. You're not if you're buying a Tesla. You're not going to go to brink A Cross to buy,

are you? Or maybe you want go to brint Cross to by Tesla's they do breaking news. Why why would you like to Cross to buy a Tesla? Don't want to be mean about brant Cross. You want the experience to go with it. How does the how does they lit I mean doing forecast? Is we get some big names going bust again? I mean, what's your sense talking to people in the market, talking to the people trading the bonds and thinking about the refinancing of these companies.

You know the Bank of England talks about maybe things are going to be a little bit rosier this year than they said last year. What's your what's your sense? I definitely think it's going to be a matter of the healthiest firms are going to survive while the weaker one are definitely gonna have to face are going to face issues. I think if you're a dead investor and you have all these like British names and they're very retail and consumer ented focus, because that's how the composition

of the British m john created the debt market. Is you're gonna want to pick the healthiest ones, the ones that have lower amounts of dead, ones that have just better cash generation, and so you can pick and choose, and the ones that you're not going to choose, the ones that are not appealing, are definitely going to have to face a wake up call. And this did not happen in the pandemic because despite the shops were being were closed for so long, it was really easy to

act as emergency liquidity. You had the government supporting you. You could act as you know, five million of new bonds at three percent interest rate. Now this is definitely not a possibility anymore. One of the things that we should also sort of take into account when it comes to retail in the environment at the moment is that

it's a big opportunity for these alternative lenders. So when retailers can't turn to their banks, you know, we're seeing these guys like Bountry Bay backed by Elliott and Hilco you know, they've recently come in and been lending. Bountry was two super Dry and Hilco was to Wilco. There's a nice little rhyme and yeah, it's an opportunity for them right to come in where the banks won't go.

And and private equity, I mean, I always feel like if you'll get the you know, famous brands that we all know on the high street, at some point they've been owned by private equity, if not now. Yeah, it's definitely a theme that we're seeing. I mean, last year it was really difficult to access financing for biots, but now credit markets are looking a little bit healthier for strong sponsors that are looking to buy debt. So we're expecting private equity firms to turn their attention to UK

retailers again because they can really buy them at cheaper prices. Now. Opportunity, there's opportunity in distress, there is. You just have to, you know, as I said before, like get ready for digesting a lot of risk and the pick and choose really which ones you believe can have a healthier outlook. Thank you, thanks for listening to this week's in the City. We will be back next week, but in the meantime.

If you like our show, please head on over to Apple Podcasts or wherever you listen to podcasts and rate, review, and subscribe. This episode was hosted by Me, David Merritt and Me Franci Laqua. It was produced by Summers Audi, additional editing by Blake Maples and special thanks to Julia Morpurgo and Katie Lindsel. Find more stories like this one featured in our The Brink newsletter, chronicling corporate distress and turnaround stories. Sign up at bloomber dot com Stash newsletters,

or via the show notes. We have to say it a bit more dramatically, The Brink