TWO of Britain’s largest DIY and furniture retail groups are in urgent talks with banks in an attempt to avoid breaching their borrowing covenants.

The news that both MFI and the privately owned Focus are renegotiating their banking arrangements is further evidence of the growing downturn on the high street.

Yet despite the deepening retail crisis, the Bank of England’s monetary policy committee (MPC) is expected to snub calls for a cut in interest rates this week, holding them at 4.5%.

MFI issued a profit warning last month, but it is believed that the furniture sector has suffered a further deterioration in sales in recent weeks. According to banking sources, there is now a real danger that MFI could breach its covenants before the end of the year.

The revelation is likely to increase the pressure on MFI’s chief executive, John Hancock. After a profit warning last year he pushed out finance director Martin Clifford-King and George MacDonald, the supply chain director. Few City observers believe Hancock could survive another profit warning.

MFI’s problems are compounded by a £295m pension deficit.

As well as owning the eponymous furniture chain — which runs 190 stores in Britain — MFI also owns Howdens, a UK-based builders’ merchants, and two small businesses in France and America.

Focus, the DIY retailer that is owned by the private-equity firms Duke Street Capital and Apax Partners, has confirmed after weeks of speculation that it is in talks with its banks.

The details of negotiations with lenders are contained in the third-quarter results, which were sent to bondholders on Thursday.

“As a result of the underperformance in the DIY and gardening market, we are in discussions with the senior banks regarding changes to certain of our covenants,” the retailer said.

The company reported sales of £202m in the 13 weeks ending on July 31, 2005 — down on the same period last year. Operating profit halved, with the group reporting £9.8m, compared with £20.3m the year before.

GUS, the Homebase-to-Argos retail group, is understood to be in talks to buy Focus.

A string of retailers were forced to deny last week that they had appointed administrators. Speculation increased as quarter day — the date when retailers pay three months’ rent — approached.

Updates next week from J Sainsbury and Austin Reed will be closely scrutinised in the City, as will the MPC’s decision on interest rates.

The “shadow” MPC, which meets under the auspices of the Institute of Economic Affairs, calls for rates to be left unchanged this month. Two members say rates should be cut, one wants a quarter-point hike, and the other six no change.

While economic data last week were weak, with growth at a 12-year low of 1.5% and the CBI reporting the sharpest retailing downturn in the 22 years of its distributive-trades survey, economists say it is virtually inconceivable that the Bank will cut this week.

Howard Archer of Global Insight, the analysis firm, said it was a “nailed-on certainty” that the Bank would leave rates unchanged on Thursday.

Last week Allsports became the latest retailer to collapse into administration, adding to the tens of thousands of jobs that have already been lost in the sector this year.

David Hughes, the founder of Allsports, has spoken of his determination to rescue from administration the company he founded. “I’ve not thrown in the towel — we’ll try to save as many livelihoods as possible and get back to doing what we used to do very well in a highly competitive retail environment,” he said.

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