Debenhams just became the latest high street giant to enter administration, with the historic retailer only being saved by a pre-pack administration agreement that saw the company’s lenders taking over business operations.
The company’s troubles over the last year have been widely documented, with the battle between shareholders, lenders, and Sports Direct’s Mike Ashley proving particularly intriguing.
In the end, Debenhams’ executives decided the pre-pack agreement was the best option for the company. The agreement has allowed Debenhams to continue trading without interruption, although there are suggestions that the new owners will look to close poorly performing shops in the near future.
According to a letter from the group in charge of the administration process, all of the company’s interests were sold for £101.81 million. The group of lenders also agreed to take on all debts and pensions, putting the total cost of the deal at £621.81 million.
October 2018: Debenhams announced huge full-year losses due in part to heavy impairment charges.
October 2018: Credit insurers reduce cover available to suppliers. Atradius was thought to have withdrawn 100 per cent of cover.
December 2018: Shareholder Mike Ashley wrote a strongly worded letter to Debenhams’ bosses in which he criticised the company’s decision to refuse his offer of a £40 million loan.
February 2019: Debenhams accepts a £40 million loan from lenders in the hopes of being able to arrange a refinancing and store closure plan.
March 11, 2019: Debenhams admits it is in negotiations with lenders about borrowing another £150 million to enable its restructuring process and convince credit insurers to restore cover for suppliers.
March 13, 2019: Mike Ashley’s Sports Direct offers Debenhams an alternative interest-free £150 million loan under the condition that it receives an extra 5 per cent of the company – taking its total to 35 per cent – and Mike Ashley is made chief executive.
March 27, 2019: Mike Ashley’s Sports Direct said it was considering bidding £61.4 million for the company, an offer that would have seen shareholders receive 5p per share; more than double their value at the time which stood at 2.2p. The offer was reliant on Mike Ashley being made chief executive.
March 29, 2019: Debenhams agrees £200 million refinancing deal with lenders. The deal was said to offer reassurance for employers, pensions, suppliers, and lenders. The retailer challenged Mike Ashley to make a takeover bid.
April 5, 2019: Mike Ashley offers Debenhams £150 million in exchange for becoming the company’s chief executive. Debenhams said to be considering the offer.
April 8, 2019: Debenhams rejects offer. Mike Ashley comes back with a revised £200 million that would see lenders write off £82 million in debt and Mike Ashley become chief executive.
April 9, 2019: This offer is also rejected. Debenhams enters administration under the terms of a pre-pack deal.
In a quote made at the time of the administration, Debenhams’ chairman Terry Duddy said: “Our customers, colleagues, pension holders, suppliers and landlords can be reassured that Debenhams will now be able to move forward on a stable footing.”
Greg Connell, a credit expert at Red Flag Alert, said that while Terry Duddy has expressed disappointment, there will be no value for equity holders. He pointed out: “Nobody has expressed disappointment for the unsecured trade creditors owed £433M, who now face considerable uncertainty.”
Debenhams’ creditors should be braced for losses, with landlords expected to be among some of the biggest losers. As expected, the new owners are pursuing a Company Voluntary Arrangement as a way to close down stores more cheaply and reduce rent in remaining stores. Currently, 22 stores are being closed and it’s thought another 30 are in the pipeline for closure.
The group is seeking a reduction in both rents and exit costs in exchange for greater certainty that Debenhams will be in a position to guarantee future commitments.
As part of the Carillion effect, creditors can expect The Pensions Regulator (TPR) to be actively involved in the restructuring of any companies with significant pension scheme liabilities. TPR is believed to have worked closely with the Debenhams board over restructuring plans because they have a statutory obligation to protect members’ scheme benefits and to reduce the risk of calls on the Pension Protection Fund (PPF).
Pre-pack administrations frequently leave pension schemes abandoned with the PPF, but trustees of the Debenhams’ schemes confirmed that liabilities will continue to be sponsored by a subsidiary that has passed to the lender’s new company.
In 2017, the scheme had an £80.9 million surplus on liabilities of around £1 billion, but member benefits are still not guaranteed; such a surplus is unlikely to be sufficient to cover the cost of guaranteeing the member benefits through an insurance company buyout.
This means the scheme will continue to be reliant on the new employer and even though the new Debenhams emerging from insolvency will have less debt than the old Debenhams plc, success on the high street could continue to remain elusive. The short-term news for pensions is encouraging, but the long-term outlook remains uncertain.
Following the collapses of Interserve and House of Fraser, the failure of Debenhams is just the latest in a long line that shows how important it is for suppliers to monitor the financial health of the businesses they work with.
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