The Business Times

Debenhams creditors prepared to lend more to ward off tycoon Mike Ashley

Published Thu, Feb 21, 2019 · 05:29 AM
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[LONDON] Debenhams's lenders are prepared to grant the struggling department store chain more credit in an effort to ward off a potential low-ball buyout from billionaire shareholder Mike Ashley.

After extending a £40 million (S$70.5 million) loan facility to Debenhams last week, the group of about 10 firms including hedge funds Alcentra, Angelo Gordon & Co and Silver Point Capital is willing to lend further if necessary, according to a person familiar with the matter.

Mr Ashley's recent push to remove Debenhams's chief executive officer and chairman from its board sparked concerns that he would look to repeat his gambit from last year, when he bought insolvent House of Fraser for just £90 million. Lenders want to make sure Debenhams can prevent the owner of Sports Direct International from buying the company at a fire-sale price, said the person, who asked not to be identified because the conversations are private.

A spokesman for Debenhams declined to comment on the company's debt talks. Representatives for BNY Mellon Investment Management's Alcentra, Angelo Gordon and Silver Point declined to comment on the firms' commitment. Sports Direct didn't respond to requests for comment.

If the lenders ultimately need to, they will take control of the retailer, the person said. Debenhams still has value that would make it worth the effort, according to Stephen Lienert, a credit analyst at Jefferies.

"If I was a lender, I'd be fighting for this business," he said.

They may face tough competition from Mr Ashley, whose efforts to snap up UK retailers have been frustrated as he lost out on bids this month for music seller HMV Group and bakery chain Patisserie Valerie. It's a change of pace for the billionaire who has made bets on brick-and-mortar stores - saying he wants to make House of Fraser the "Harrods of the high street" - even as others cut outlets to beef up e-commerce.

"Ashley definitely won't miss out on Debenhams," said Richard Hyman, an independent retail consultant. "He'll get in one way or the other and it will be on his terms."

Debenhams is struggling with declining sales as it looks to refinance about £520 million of debt facilities while paying millions of pounds a year in rent on leases agreed to years ago. The problems stem from its 2003 leveraged buyout led by private-equity firms CVC Capital Partners Ltd and Texas Pacific Group. The buyers saddled Debenhams with debt and sold stores to grow the company and pay themselves dividends.

The retailer isn't completely opposed to more investment from Mr Ashley. While Debenhams rejected his offer of a loan last year, the company invited him to play a role in the refinancing. The lenders may support an equity injection from him, the person said. Debenhams handed over key financial data to Mr Ashley last week to help him participate in refinancing, The Guardian reported on Feb 16.

But last week's loan has already given the mix of Debenhams bondholders and lenders secured status in the company's structure, above unsecured lenders and shareholders in the pecking order of stakeholder claims. That puts them "closer to the table than Ashley," said Mr Lienert, the Jefferies analyst.

"They are in a much better place than they were and Ashley is in a worse place," he said.

Debenhams is seeking to refinance by the end of the second quarter, the company said last week. The new loan adds pressure to refinance quickly because the variable rate could rise during the quarter.

The retailer also needs to agree to a company voluntary arrangement (CVA), a UK court process that can allow insolvent firms to renegotiate leases with landlords, according to Louise Parker, an analyst at Bloomberg Intelligence. That would require the consent of bondholders and lenders, she said.

"The punitive rate on that lending makes the situation a ticking time bomb," said Ms Parker. "The company has it over their head to find a permanent solution, probably a debt restructuring and a CVA."


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