Debenhams secures financial lifeline with credit extension

Debenhams has secured a financial lifeline to preserve the struggling department store group’s independence and pave the way for a more fundamental restructuring.

Shares in Debenhams rose 40 per cent on the agreement reached with banks and some of its bondholders which provides an immediate £40m credit line for the company.

The deal, intended to “act as a bridge to facilitate a broader refinancing and recapitalisation”, fends off pressure from Mike Ashley’s Sports Direct, the retailer’s biggest shareholder.

Sports Direct unseated the two most senior directors in Debenhams in January to strengthen its hand ahead of what many believe will be a grab for full control of the ailing department store group. The credit line provides the same amount of funds as a loan offered by Sports Direct last year.

Debenhams said it had entered an agreement with Hong Kong trading company Li & Fung to develop a strategic sourcing partnership. Expected to cover a material part of the company’s own-brand sourcing, Debenhams said this would result in improved product quality and lead-times, higher achieved margins and better working capital efficiency.

Sergio Bucher, the Debenhams chief executive who was voted off the board by Sports Direct in January but who continues to run the company, said the steps were “a key part of our turnround plan”.

The retailer has suffered from poor trading and is hamstrung by expensive, inflexible lease commitments. It is widely expected to pursue a restructuring of its rental commitments using an insolvency scheme known as a company voluntary arrangement.

“Today’s announcement represents the first step in our refinancing process. The support of our lenders for our turnround plan is important to underpin a comprehensive solution that will take account of the interests of all stakeholders, and deliver a sustainable and profitable future for Debenhams,” the company said. 

Shares in Debenhams rose 1.4p to 4.53p, giving the company a market capitalisation of £56.4m – still well below the retailer’s peak value of around £1.7bn in 2006.

As trading worsened at the company last year, Debenhams started to lay the groundwork for a refinancing. Matt Smith, its previous finance director, renegotiated the terms of its £320m revolving credit facility to forestall a technical breach of its fixed-charge covenant, which measures profit against rent and interest obligations.

His successor, Rachel Osborne, said after Christmas that the company would prioritise the renegotiation of its banking facilities. The efforts to stabilise Debenhams come amid strong criticism of the group from Mr Ashley, whose Sports Direct group owns 29 per cent of its shares.

His offer of an interest-free loan last year was widely seen as an attempt to increase his influence over the company by making himself a secured creditor. The offer was rejected on the grounds that it was not in the interests of all shareholders. Sports Direct has not yet responded to a request for comment.

In addition to its bank debt, the company has £200m of unsecured senior notes in issue, which fall due for redemption in 2021. A semi-annual coupon of £5.25m was paid in January, with the next payment due in July. 

The group had been expected to shore up its balance sheet by selling Magasin du Nord, a chain of seven department stores in Denmark that analysts said could be worth up to £200m. But it said in January it was unlikely to receive a price for Magasin that reflected its value. The international division, of which Magasin is part, achieved earnings before interest, tax, depreciation and amortisation of £45.3m last year.