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* House of Fraser bonds join New Look and Matalan in riskzone
* Brexit increases pressure on fashion industry
* House of Fraser, New Look refinanced last year
* Matalan debt matures in 2019
* Credit ratings of M&S, Next look safe for now - Moody's
By Emma Thomasson and Maiya Keidan
BERLIN/LONDON, Nov 2 (Reuters) - Heavy discounts on debtissued by some big UK retailers reflect growing commercialpressure after Britain's vote to leave the European Union andahead of the crucial Christmas trading period.
Bonds issued by department store House of Fraser last weekjoined unlisted fashion retailers New Look and Matalan intrading below 90 pence in the pound, indicating that bondinvestors are braced for potential losses on the debt.
The value of House of Fraser bonds fell to 83 pence from 90pence, raising questions about the health of the chain bought in2014 by Chinese conglomerate Sanpower even as it prepares toopen its first store in Nanjing in China.
"This House of Fraser issue and news of heavy machineryrenter Hewden coming under pressure could raise concerns of apost-Brexit impact on UK corporates," said Anthony Lawler, headof portfolio management at hedge fund investor GAM.
"Whether this is a one-off or a canary-in-the-coalmine isway too early to tell," he said.
Hedge funds often buy distressed debt as a bet they can makereturns on a rise in bond prices if the company is turnedaround, although investment in a firm's bonds could also signalan interest in taking control.
Britain's economy has performed better than most forecastssince the June Brexit referendum, largely thanks to strongconsumer spending. But surveys show consumers are becoming morepessimistic as sterling's slump cuts disposable income.
WEAK POUND WORSENS FASHION WOES
Fashion chains are seen as more exposed than other retailersbecause they could struggle to pass on cost increases from thepound's fall as the market has become reliant on discounts toclear stock after periods of unseasonable weather.
"It might be difficult for clothing retailers to make pricerises stick especially if discretionary income is under pressurefrom inflation in other less discretionary spending like food,"said David Beadle, a senior credit officer at ratings agencyMoody's.
Britain's Next reported sales on items withoutmarkdowns in its third quarter fell 3.5 percent and warned thatthe weak pound could increase the cost price of garments by upto 5 percent in 2017 in a worst case scenario.
House of Fraser reported sales for the eight weeks to Sept.24 fell by 2 percent but said it was cautiously optimistic forthe rest of its fiscal year, with the Black Friday and Christmasperiod usually accounting for about 85 percent of annual profit.
"The Christmas trading period is clearly critical for them,"said Sohail Malik, co-founder and portfolio manager at RoxburyAsset Management. "As for the major shareholder and futuresupport, questions remain."
Owner Sanpower did not respond to a request for comment andHouse of Fraser declined to comment.
Founded in 1849, House of Fraser operates 62 stores in theUnited Kingdom, Ireland and the Middle East. It is openingconcessions of British toy retailer Hamleys, the chain whichSanpower bought last year, and has appointed two new seniormanagers to help review its strategy.
Moody's has warned it could cut its outlooks for House ofFraser (which it rates B3 stable) and New Look (rated B2 stable)if they do not take actions such as cutting capital expenditureor costs to preserve liquidity.
However, Moody's Beadle said the concerns were notimmediately pressing: "Neither House of Fraser nor New Look haveimminent debt maturity to worry about."
REFINANCING
New Look refinanced its debt last year following itsacquisition by South African tycoon Christo Wiese's investmentvehicle Brait SE, extending its average debt maturityby four years and cutting average interest costs to 6.3 percentfrom 9.4 percent.
It has 877 million pounds in debt that matures in 2022 and2023, trading at 89.5 pence for secured notes and 79.5 pence forunsecured.
House of Fraser also refinanced its debt last year, issuinga 175 million pound floating rate note that matures in 2020 aswell as a 125 million loan and a 100 million revolving creditfacility.
Family-owned Matalan, which runs 226 stores in the UnitedKingdom, is under more pressure.
In April, Matalan said it had amended conditions for a 50million pound revolving credit facility with Lloyds after it wasplaced in the bank's support unit for troubled companies.
Matalan reported earnings before interest, taxation,depreciation and amortisation (EBITDA) almost halved to 56.2million pounds ($69.2 million) for the year to Feb. 27 due towarehouse problems, but it has reported a recovery since then.
However, outstanding debts of 492 million pounds that maturein 2019 and 2020 are still trading at heavy discounts: 75.9pence for the secured tranche and 65.5 pence for unsecured debt.
"We expect they will need to actively consider refinancingoptions during the course of next year," said Beadle.
Matalan declined to comment.
Major listed retailers such as Next and Marks and Spencer have also seen the price of their debt fall steadily inthe last year, but Moody's says both can cope with lowerprofitability and higher costs.
Moody's rates Next Baa2 stable and M&S at Baa3 stable,predicting Next's profitability will be more resilient as itsexpected sales decline is less pronounced.
"Both M&S and Next have a decent amount of headroom in theirrating categories although they face the same challenges as therest of the sector," said Beadle.
($1 = 0.8123 pounds)
(Additional reporting by Robert Smith at IFR; editing by DavidClarke)
