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Debenhams shares rocket on back of financial lifeline but long term future still cloudy

The chain's existing lenders have ponied up £40m to give the company, which is starting to look like Brexit in miniature, time to fix up a longer term plan 

James Moore
Chief Business Commentator
Tuesday 12 February 2019 14:20 GMT
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Debenhams CEO Sergio Bucher promises his 26,000 staff he will 'try to protect as many jobs as we can' during closures

Debenhams shares shot up like one of Elon Musk’s rockets this morning, as news of the financial lifeline that broke last night was confirmed.

The troubled retailer has secured a £40m facility from its lenders that will keep the show on the road over the next couple months while attempts to refinance and rescue the thing proceed.

The term ‘breathing room’ was being used a lot in the coverage. But so was ‘kicking the can down the road’ with respect to its future.

Anyhoo, Debs will pay Libor interest rates plus 5 per cent. This is a bridging loan and it’s priced like one. There are provisions for that price to go up if a more permanent solution to the company’s problems doesn’t get found quickly, so the can can’t be kicked for long. If that looks a lot like Brexit to you, you wouldn't be alone in drawing the parallel.

Mike Ashley, the biggest shareholder via his Sports Direct, offered a similar sum interest free over Christmas. The problem is that it came with strings.

I imagine the group’s other shareholders would prefer the devils they know among their lenders if the alternative is Ashley’s deep blue sea, regardless of the high price they’re exacting.

But the company might still end up there. It is hobbled by more than £500m of debt and a lot of underperforming stores with high rents that it needs to close.

The shares’ rapturous response to the lifeline needs to be put in context. Debenhams has become catnip to short sellers betting on its demise, not to mention other gamblers hoping to make a turn on the stock market rollercoaster companies in this sort of situation tend to ride.

Some of them will have closed out their positions as a result of the financing it has secured, helping to push the shares sharply higher. But future for investors with a time horizon longer than five minutes is cloudy indeed.

At about £50m, Debenhams’ market value is less than a tenth of its debt, which it needs to reduce. The options for doing that include some type of debt for equity swap, or a company voluntary arrangement, which is a form of insolvency.

Investors are going to get clobbered whatever finally emerges. They’ve been squabbling with each other, and Ashley managed to get CEO Sergio Bucher, who must wish he’d stayed put at Amazon, booted off the board a while back.

The company is in a bad situation, going into talks abut its future with a bad hand while its stakeholders are bitterly divided. Questions about its long term future persist, and confidence in the people running the show isn’t high. See what I mean about that Brexit analogy?

But let's say Bucher and co spring a surprise - the own-label, long-term sourcing partnership with Li & Fung included in the bridging loan announcement was clearly intended to show confidence - and pull something off.

The questions about whether there is still a place for a store like Debs on Britain’s bombed out high streets and retail parks, will remain even were Britain not looking increasingly shaky economically with a no deal Brexit set to bring a hammer down on everyone.

So, pity the people that work there, because thousands of them are going to have to find alternative employment soon, and spend any gift cards you have. If you were thinking of buying one for someone, don’t and make sure you protect yourself by using a credit card for any other pruchases.

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