JJB Sports in Freefall as Bank Takes Fright

Friday 26 September 2008 was a grim day for shareholders of quoted retailers, none more so than for JJB Sports whose share price fell by a further 50% as fears grew that the business may soon fail…

JJB Sports revealed yesterday it was in dispute with HBOS over its banking covenants, leading JJB’s auditors Deloitte to warn it might not continue as a going concern and triggering a 50 per cent fall in the retailer’s share price.

In their note to accompany JJB’s half-year results, Deloitte noted that the company’s financing left it with “material uncertainties that may cast significant doubt about the group’s ability to continue as a going concern”.

Banking covenants are a complex but important part of the financing of many large retail groups. The way they work is basically like this:

- The bank provides a loan to the business, usually over a fixed period and at a rate of interest that is linked to the Bank of England Base Rate (e.g. 1% above base rate)
- The business has to promise (“convenant”) that its financial results and position will be good enough to meet various tests - these tests are generally reviewed every quarter (3 months) or six months
- Covenant tests vary, but they often focus on liquidity and gearing ratios. Some covenant tests also look at the level of fixed costs in a business. This is important in retailing, since much of the cost base is fixed (store rents)
- If the covenants are broken (i.e. the test are failed), then the bank has the right to withdraw the loan funding or to demand higher interest payments.

That is what has happened to JJB. A significant deterioration in trading has led to a suspected breach of banking covenants. It is suggested in the press today that HBOS (now Lloyds HBOS) are demanding extra interest payments of £450,000 as a result.

The future for JJB looks tough. It is already going through a significant change programme after the founder Dave Whelan sold his share in the business to new management and investors. It looks like the management might attempt to take the business private” (i.e. remove it from the Stock Market), assuming it can survive the next few tough months. The good news for JJB Sports is that it makes over 75% of its sales over the key Christmas season and we are fast approaching the season of goodwill!