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Stricken Debenhams gets another rating agency hammering

Publication Date: 04 Apr 2019 - By Gaurav Sharma (Editor ReachX) By Gaurav Sharma (Editor ReachX)
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Equity Fundamental Equity UK EU ex-UK Consumer

Struggling retailer Debenhams (LON:DEB)which is in the middle of a restructuring drive has been clobbered with another ratings downgrade. 

The company's underlying revenue and profitability have been on a negative trajectory for over two years, and its market capitalisation has fallen in step by more than 90% in the past 18 months, to only around £30m currently from over £500m.

In a note to clients, Moody’s said it had downgraded the corporate family rating (CFR) of Debenhams to Ca from Caa1 and its probability of default rating (PDR) to Ca-PD from Caa1-PD, after having placed the retailer on negative watch in January. 

Concurrently, the rating agency has downgraded the rating on the £200m 2021 senior notes issued by the company to Ca from Caa1, with a negative outlook. 

"We have downgraded Debenhams' ratings as a balance sheet restructuring involving losses for financial creditors looks inevitable. Revenue and profitability continue to fall, and plans to shrink rental costs won't be enough to repair the retailer's capital structure, with a debt to equity swap now a likely element of any solution," said David Beadle, Vice President  and Senior Credit Officer at Moody’s.

Beadle added that the probability of such an occurrence has increased after the company obtained approval on 28 March from its existing lenders to certain amendments to the facility documentation and the establishment of new credit facilities totalling £200m (New Money), which will be secured and ranking ahead of existing debt.

However, security has also been extended to existing debt. These new facilities were confirmed on 29 March.

Alongside the agreement in respect of the New Money facilities, the company has given its largest shareholder billionaire businessman Mike Ashley’s Sports Direct (or any shareholding in excess of 25%) until 8 April to enter into an agreement with Debenhams and its lenders which addresses the capital structure to their mutual satisfaction. 

This would include, for example, satisfactory arrangements in respect of the debt which becomes due and payable on a change of control. 

In the absence of such agreement, the lenders under the New Money facilities will have the ability to direct and/or participate in a sale of the assets of the company to a lender-approved entity. Under these circumstances there would likely be no equity value for the company's current shareholders, Moody’s noted. 

The company however states that the operating subsidiaries of the group would still continue to have access to the facilities with no disruption to Debenhams' business, customers, suppliers or operations. 

Debenhams has confirmed that it plans a restructuring of its store estate to reduce its future rental expenses. However, Moody's view is that in isolation this will not prove sufficient to repair the currently unsustainable nature of the company's capital structure, and that a balance sheet restructuring has become inevitable. In these circumstances a debt/equity swap would be a likely outcome. 

Providing rationale for its negative outlook, Moody’s said it reflects the view that Debenhams will default on its financial obligations, whether as part of current negotiations or as debt maturities approach.

“Upward pressure on the rating is unlikely in the short term but could arise if a sustainable capital structure is put in place. Downward pressure on the rating could arise if expected recovery rates for financial creditors are less than 35%,” the agency concluded.

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Gaurav Sharma Editor ReachX

 

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