(Bloomberg) -- Matalan bonds dropped the most since June 2020 after founder John Hargreaves lost a long-running tax battle in the British courts.

Hargreaves’ defeat comes at a delicate time for the U.K. company, which has until early next year to repay a 350 million-pound bond. In 2020, the businessman stepped in to facilitate a previous debt restructuring by Matalan. 

Lenders waived Matalan’s leverage covenant last year, giving it some breathing space while it negotiates an extension in its credit facility and refinances looming bond maturities. However, its covenant holiday on its bank debt expires next quarter. The clothing retailer’s notes dropped as much as 3.3 pence to 93.1 pence on Tuesday, according to Markit pricing. 

A spokesperson for John Hargreaves said, “Mr Hargreaves is actively considering appealing this latest judgement. It would be inappropriate to comment further at this stage in the process.” A Matalan spokesperson declined to comment. 

“We’re a bit surprised by the drop in bond prices today, which illustrates investor nervousness about how Hargreaves will fund his tax bill,” said Louise Parker, a credit analyst at Bloomberg Intelligence.

Hargreaves, who’s been disputing his tax status with HM Revenue & Customs for almost 20 years, may have to pay as much as 135 million pounds ($183 million) with interest, The Sunday Telegraph reported at the weekend. The Monaco-based businessman was told he must pay capital gains tax on his sale of 231 million pounds of shares in the clothing retailer in May 2000.

Financing Struggles

Matalan’s notes rose last month after it reported strong third-quarter and Christmas sales numbers. Still, the firm concluded a series of investor meetings in January with Goldman Sachs Group Inc. without a refinancing deal on the table, according to a person familiar with the matter.

The company continues to monitor market conditions with respect to a potential refinancing of its outstanding debt, it said in a business update released on Monday.

Matalan’s cash position -- which stood at 163.3 million pounds on Jan. 1 -- will take a hit in the last quarter of the fiscal year, which finishes at the end of this month. The figure is expected to fall by 45 million pounds to 55 million pounds due to planned capital expenditure, quarterly VAT return payments, interest payments and the unwinding of pandemic-related mitigation measures, according to the statement.

Matalan underwent a debt restructuring in 2020 in which Hargreaves agreed to exchange 50 million pounds of the second lien bonds he held into unsecured, non-cash pay notes with a longer maturity date. Later that year, a firm backed by Hargreaves bought from Matalan and leased back to the company its Liverpool headquarters for 25 million pounds, which went to repay a loan the company had taken from the British government during the first lockdown.

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