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Moody's downgrades Debenhams

Credit ratings agency Moody’s has downgraded Debenhams as a restructuring looks set to involve losses for the department store’s financial creditors. 

Moody’s has downgraded the ailing department store’s corporate family rating to Ca from Caa1 and its probability of default rating to Ca-PD from Caa1-PD.

It also downgraded the rating on the £200m 2021 senior notes issues by the company to Ca from Caa1. 

The outlook assigned for Debenhams remains negative. 

Vice-president and lead analyst for Debenhams at Moody’s, David Beadle, said: “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.

Debenhams secured a £200m refinancing deal from its existing lenders on 29 March. 

It received the first £101m of this funding last week. The remaining £99m is conditional on Sports Direct – which owns 29% of Debenhams – or another major (25%-plus) shareholder making a “firm and binding offer” for the retailer, which must include an agreement to refinance its £560m group debt.

Alternatively, Sports Direct could provide funding for Debenhams in the form of equity or a loan known as a “subordinated debt instrument”, and cancel its request for an extraordinary general meeting (EGM) to appoint its boss, Mike Ashley, as CEO of the department store.

If neither happens by 8 April, Debenhams will enter a pre-pack administration.

Moody’s believes this funding will boost the company’s liquidity initially, but place financial creditors at risk in the long term. 

Beadle said: ”The company’s underlying revenue and profitability have been on a negative trajectory for more than two years. In a changing and challenging retail environment, the company has also faced increasing pressure on its working capital in recent months as credit insurers have reduced the levels of cover available to its suppliers. In this context, Moody’s believes the new credit facilities will boost the company’s liquidity in the short term.”

Debenhams has also reconfirmed the restructuring of its store estate, which will begin after Christmas and involve 50 stores. However, Moody’s doesn’t believe that this will provide sufficient relief for Debenhams. 

Beadle added: ”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.”

Moody’s last downgraded Debenhams in January. 

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