Debenhams in Administration

Tuesday 9th April 2019.

Control of Debenhams has fallen into the hands of its lenders as part of an administration process.

Debenhams has 166 stores, which for now continue to trade, although it has indicated that 50 branches are earmarked for closure in the future.

The department store rejected last-ditch rescue offers from Mike Ashley’s Sports Direct, which has been locked in an acrimonious battle for control.

Its lenders are made up of High Street banks and US hedge funds.  These include Barclays and Bank of Ireland, as well as Silver Point and GoldenTree.

The administrators said the lenders would now look to sell the business as soon as possible.

What happens now?

Debenhams has passed through a pre-pack administration process. This lets the company sell the trading business, or its assets, as a going concern, without affecting the operation of the business and frees it from the debt burden on the original company.

The lenders now take control of the business in the new company, and shareholders of the publicly listed company, Debenhams lose their investments.

Muke  Ashley had a 30% stake in the company, which cost about £150m to build up, and it  will be wiped out.

Debenhams has not released the list of the stores it will close (approximately one third). As well as the planned closures, it has also been renegotiating rents with landlords of the stores it wishes to keep to tackle its funding problems.

It has not released a list of which shops may be shut.

The company explained that its restructuring plans would continue and that, if approved, they would “result in a significant overall reduction in the group’s rent burden and underpin a sustainable future”.

The stores will continue to trade as normal and administrators have confirmed that customers will be able to spend any gift cards that they already have.

What has Debenhams said?

Debenhams chairman Terry Duddy said: “We remain focused on protecting as many stores and jobs as possible, consistent with establishing a sustainable store portfolio in line with our previous guidance.

“In the meantime, our customers, colleagues, pension holders, suppliers and landlords can be reassured that Debenhams will now be able to move forward on a stable footing.”

A spokesman for the company’s pension schemes said the schemes had been transferred to the newly incorporated company. “Members can therefore be reassured that the schemes are carrying on as usual.”

Debenhams offered £150m rescue deal by Ashley

In exchange for being made chief executive of the department store group, Debenhams’ biggest shareholder Mike Ashley had offered to underwrite £150m of new equity funding to save the business from entering administration. When that was rejected, he increased the offer to £200m. The offer from the boss of Sports Direct was also contingent on lenders agreeing to write off £148m of debt, in a move that would have seen lenders given equity in the company instead.

Announcing the offer in a letter to Debenhams, Sports Direct stated that it was “keen to be a supportive shareholder and financier,” adding: “Mr Ashley’s appointment would immediately relieve any pressure on the company’s supply chain and he would be in a position to lead the restructuring of the company’s stores and operations.”

Chain rejects deal and chooses administration

The biggest loser today is Mike Ashley. In this tussle he’s found himself on the wrong side of the fence.

Debenhams has a huge pile of debt, which it needed to refinance and couldn’t afford to repay. In the end, lenders were calling the shots on the fate of this business.

Mr Ashley’s series of proposals all came with strings attached, which the lenders simply didn’t like.

One major sticking point was that he wanted to become chief executive. The hostilities became ever more acrimonious, which didn’t help. At one point he suggested two board members take lie detector tests.

The lenders were also suspicious of Mr Ashley’s intentions. “If we give him the keys to the castle, he might change the locks,” said one person familiar with the situation.

Sports Direct threatens to sue after shareholders wiped out

The announcement has been met with criticism from Sports Direct CEO Mike Ashley — who dubbed the chain’s decision to pursue a pre-planned administration “a national scandal” and is said to be considering legal action against Debenhams’ directors over shareholder losses. Shareholder stakes in the company — including Sports Direct’s 30% holding — have been wiped out as a result of the insolvency.

Sports Direct, which made multiple rescue deal offers to Debenhams, noted that it had made “prolonged and varied attempts and proposes to rescue the company as a going concern,” but faulted Debenhams’ directors and lenders for “not appear[ing] to share that goal.” Debenhams chairman Terry Duddy meanwhile acknowledged that it was “disappointing to reach a conclusion that will result in no value for equity holders.”

High street chains continue to struggle

The collapse of Debenhams underlines the ongoing battle faced by high street retail companies to stay afloat, as increasing competition from online retail and rising wage, tax and rent costs place unsustainable pressure on cash flow. Last year was dubbed by some as the ‘year of CVAs,’ as a number of major retail chains sought out the administrative agreements as a way to reduce costly lease burdens and remain operational. For Debenhams, the insolvency arrangement offers a way to make substantial cost savings. Data indicates that the retailer’s stores have an average lease term of 18 years, with a minimum of £4.3m in lease payments over the next 20 years.

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About CPA

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