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Debenhams secures short-term refinancing

The stricken department store has been thrown a 12-month lifeline, but action must be taken
February 12, 2019

Debenhams' (DEB) shares rebounded after the department store chain revealed it had secured an additional 12-month senior secured credit facility with lenders, adding roughly £40m-worth of liquidity. This should act as a bridge until a broader refinancing and capitalisation is agreed during the second quarter of this year. 

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Analysts at Whitman Howard believe the loss of credit insurance and the projected April "borrowing peak" contributed to the need for this "stop-gap". The brokerage estimates that the new facility will provide enough financial headroom for the next couple of months and "reflects the tightening of supply payment terms with reduced credit insurance".

The retailer has also partnered with supply chain solutions group Li & Fung to improve product quality and lead-times, grow margins and improve working capital efficiency. In Whitman Howard’s view, the deal suggests "that a very serious global sourcing operator doesn’t regard Debenhams as a write-off" – hence the shares’ overwhelmingly positive response to the news.

Despite being voted off the board in mid-January by shareholders – including 30 per cent stakeholder Mike Ashley – chief executive Sergio Bucher said the Li & Fung deal would give Debenhams access to "state-of-the-art technology" and provide "end-to-end visibility across [the] supply chain", helping it to "anticipate and respond more quickly to trends and customer preferences".

However, there are still unanswered questions. Citi Bank admits the eventual outcome is "uncertain" but could involve a debt-for-equity swap with lenders writing off a proportion of the group’s debt, a company voluntary arrangement (CVA) to reduce lease and debt liabilities, or a voluntary agreement with landlords to close stores as per a mutual timetable, in addition to a longer-term refinancing.