Fitch says Focus debt burden is “unsustainable”

The ratings agency has downgraded £100m of mezzanine loans for Focus, a do-it-yourself retailer owned by Duke Street Capital and Apax Partners, over the increased possibility of a default.

Fitch Ratings, a credit ratings agency, has downgraded the mezzanine notes for Focus, a do-it-yourself business owned by private equity firms Duke Street Capital and Apax Partners.
Focus has had its £100 million (€147 million) of mezzanine loans downgraded to CC. Pablo Mazzini, a director in Fitch’s European leveraged finance team, said in the report that, despite the business retaining a stable market share, the “run-rate trading EBITDA is making the current debt burden increasingly unsustainable.”
Mazzini continued: “The heightened probability of default is on expectation of poor long-term profitability and weak free cash flow generation. Focus’s business remains viable but cannot withstand the current amount of debt relative to the group’s earnings potential.”
As a result, said Fitch, a debt restructuring for Focus was “inevitable” in the foreseeable future.
Fitch said that Focus and other retailers in the UK do-it-yourself market had been impacted by rising interest rates alongside a less booming housing market. In these conditions, said the agency, Focus’s highly leveraged balance sheet impairs its ability to compete on pricing, promotional activity and store openings.

Oliver Mayer, a partner at Duke Street Capital, declined to comment on Fitch’s downgrading but said that the do-it-yourself market “has traded very badly across the board but Focus is trading better recently. The capital structure has become too heavy and we are addressing that. Duke Street has been a long-term investor in Focus and we have always supported them.”

Mayer added that there were no immediate plans for Duke Street.
In January of this year, Focus reportedly renegotiated its bank loans in order to waive covenants until April 2007 but with higher interest payments.
Last September, rival ratings agency Standard & Poor’s cut its rating of Focus’s £100 million mezzanine debt to CCC and warned that potential for lenders to recover their debt had deteriorated.
Duke Street Capital first invested in Focus in 1987 when it had just six outlets and has built the business with a series of acquisitions including retailer Wickes, acquired in 2000 and sold to Travis Perkins in a £950 million transaction in December 2004. Duke Street Capital sold a 29 percent stake in Focus, which now has more than 250 stores, to Apax Partners in 2002 for £120 million shortly after shelving plans for a flotation of the business.
Duke Street Capital was not immediately available for comment.