In Depth

Can Debenhams survive?

Struggling department store group secures £40m credit line to pave way for restructuring

Debenhams has secured a £40m cash injection as the embattled department store chain fights to secure its financial future.

Shares in the retail giant rose by 40% after banks and bondholders agreed to the additional secured debt.

Debenhams chief executive Sergio Bucher said the lifeline was a “first step in our refinancing process” to “deliver a sustainable and profitable future” for the company.

The chain - which employs around 25,000 people - is still expected to pursue a company voluntary arrangement (CVA), which could see up to 20 of its 165 UK stores close by the end of the year. Thousands of jobs could be lost, and the landlords of properties where stores remain open may also have to make heavy rent reductions.

Debenhams had announced in October that up to 50 of its shops would be closing over the next three to five years, putting a total of 4,000 jobs at risk, but the CVA may speed up the closures, reports the BBC.

What went wrong?

“The department store chain is buckling under the weight of its rent bill as high-street sales increasingly move online,” says The Sunday Times.

The company’s annual rental costs amount to £290m, with many stores locked into long leases agreed when the retail market was on the up.

These occupancy costs were almost ten times the retailer’s underlying profit last year, the newspaper adds.

Meanwhile, “some £520m of loans dwarf Debenhams’ current stock market valuation of little more than £40m”, reported The Daily Telegraph earlier this month.

What happens next?

“This debt agreement is a lifeline for Debenhams, but isn’t going to solve its fundamental problems,” says Laith Khalaf, senior analyst at financial services firm Hargreaves Lansdown.

“Trading conditions remain extremely challenging and the business has a tightrope to walk between cutting costs and investing in improvements.”

The Guardian notes that the CVA route is one that has already been taken by other struggling high-street chains including New Look, Mothercare and Carpetright, “as the whole industry struggles with a combination of rising costs, falling sales and the switch to internet shopping”.

The paper adds that “CVAs can take several weeks to arrange and it is not clear if a deal can be put in place before Debenhams’ quarterly rent day in late March, when it will have to pay out about £50m to landlords”.

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