Carpetright secures emergency loan, announces cash call and CVA

Floor coverings retailer Carpetright said on Wednesday that it has secured an emergency loan from one of its biggest shareholders as it announced a cash call and said it is looking at a company voluntary arrangement to cut rents and close stores.

The group has entered into an unsecured loan agreement with Meditor, a "substantial" shareholder, for £12.5m to help with its short-term working capital requirements.

In addition, having said at the beginning of the month that it was exploring a range of options to accelerate the turnaround of the business and strengthen the balance sheet, Carpetright is now looking at the possibility of a company voluntary arrangement to address the legacy property issue inherited from previous leadership.

Following the CVA, it plans to raise between £40m and £60m through an equity issue, with the proceeds used to fund the ongoing strategy, reduce indebtedness and cover the costs associated with the CVA.

Chief executive Wilf Walsh said: "The aggressive store opening strategy pursued by the company's previous leadership has left Carpetright burdened with an oversized property estate consisting of too many poorly located stores on rents which are simply unsustainable. The company has worked hard over recent years to address this legacy issue and reduce the size of its property estate, however many of these poor performing stores still have long leases to run, which has limited our ability to exit a meaningful number in the short-to-medium term.

"While the board is confident that its brand investment and store refurbishment strategies have been, and will continue to be, successful in enabling Carpetright to respond to increased competition, it believes additional measures are necessary to directly address this legacy property issue. The board is therefore exploring the feasibility of a CVA in order to expedite the rationalisation of its property portfolio, with the clear objective of establishing a right-sized estate of contemporary stores, on economic rents, complemented with a compelling online offer."

Walsh said the conditional equity issue would provide the necessary funds to accelerate its turnaround and address the competitive threat from a position of financial strength.

Neil Wilson, senior market analyst at ETX Capital, said: "This is very much the nuclear option but one that Carpetright has been forced to take by combination of having too many underperforming stores off the back of a too-rapid expansion, rising costs, a soft consumer market as real wages have fallen, a slowing property market with people moving less often and greater competition from the likes of Tapi. A perfect storm for the company, but it might just have found its compass to navigate its way out of trouble.

"This was largely anticipated. Following the March 1t update a scramble to avoid breaching its banking covenants was obvious, as was the need for a cash call."

Wilson added that while the equity raise sounds small enough, that’s against a market cap of about £28m as of Tuesday''s close so it's "huge" in that context.

"The cash call and firmer balance sheet could result in shares rallying today if investors decide it’s enough to fix things - shares had collapsed on fears it might head the way of Toys R Us, so there may yet be upside from here."

At 0808 GMT, the shares were up 6% to 43p.