Debenhams market cap falls below £40M as its outlook is lowered to ‘negative’

Beleaguered UK retailer Debenhams (LON:DEB) has suffered another blow after a leading rating agency lowered its outlook on the company from ‘stable’ to ‘negative' as its market capitalisation continues to plummet. 

In a note to clients, Moody’s Investor Service said the change reflects its view of there being a risk that Debenhams' refinancing negotiations may not result in a timely and cost effective solution, and thus the process could ultimately culminate in losses for financial creditors. 

Last week Debenhams published a dire Christmas trading update with 5.7% decline in like-for-like sales over the festive period. Alongside weak operational performance, the company announced discussions have commenced with lenders in respect of the refinancing of its £320 million revolving credit facility (RCF), which is due to mature in June 2020.

Pending the outcome of those discussions, which the company stated includes the option to bring new sources of finance into the business, asset disposals have been put on hold.

Furthermore, Debenhams largest shareholder, Sports Direct International (with a 29.7% stake) has been publicly vocal in its dissatisfaction with board. Most recently this was evidenced at last week's AGM when shareholder votes led to the resignation of the Chairman and the removal of the CEO from the company's board.

Despite having a negative outlook, on 16 January, Moody's affirmed Debenhams on the Caa1 corporate family rating (CFR), Caa1-PD probability of default rating (PDR) of Debenhams (Debenhams or the company), as well as the Caa1 rating on the £200 million due 2021 senior unsecured notes issued by the company. 

David Beadle, lead analyst for Debenhams at Moody’s, said: "Notwithstanding this and the company's elevated leverage we continue to view Debenhams liquidity profile as adequate for the time being.”

Moody's had previously envisaged that a sale of the company's Danish business, Magasin du Nord, would be likely ahead of a refinancing. In the rating agency's view, this would have resulted in a more manageable ongoing borrowing requirement. 

However, maximising value from disposals is difficult if potential buyers consider they are dealing with a 'forced seller'. The company's high debt burden and weak operating performance could also hinder its ability to successfully conclude a timely and cost effective refinancing without a fresh injection of equity capital.

Moody’s believes the company's prospects of access to fresh capital will have been hindered by the significant fall in Debenhams share price. The company's market capitalisation has declined from over £500 million in late 2017, to around £100 million at the time of its preliminary results announcement in October 2018, to £37 million at the time of writing. 

Debenhams is the UK's largest department store group by number of stores (165 in fiscal 2018), and operates internationally through 11 stores in the Republic of Ireland, six owned stores in Denmark trading as Magasin du Nord, over 60 franchise stores in more than 20 countries that are owned and operated by local partners, and international online sales.