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Debenhams landlords brace for CVA after pre-pack

Debenhams landlords are preparing for the retailer to launch a company voluntary arrangement (CVA) to reduce costs, after entering a pre-pack administration today.

Chad Griffin, Simon Kirkhope and Andrew Johnson of FTI Consulting were appointed as joint administrators of Debenhams plc today, wiping out equity for shareholders including Sports Direct.

Only the plc part of the business has been placed into administration. The underlying group operating companies – under which Debenhams’ commercial relationships with suppliers, employees, pension holders and customers all sit – were immediately sold to a new company owned by Debenhams’ lenders and are continuing to trade as normal, including its 166 stores.

However, Debenhams is expected to launch a CVA process to close 50 stores and reduce rents, to turn the business around.

“Clearly, the new lender owners will need to streamline operations and try to achieve huge cost savings to save Debenhams effectively by offloading a high number of poorly performing stores. This is likely best achieved via a CVA,” said Tim Carter, partner at law firm Stevens & Bolton. 

“A number of retailers have recently used CVAs to obtain a reduction in onerous rent obligations imposed by their landlords –  essentially an attempt at survival. Such CVAs have been subject to challenge, especially where landlords of different sites are treated differently by the CVA; a scenario no doubt to be repeated within any CVA proposed by Debenhams. Its continued presence on the high street remains far from certain.”

Property sources expressed concern that few retailers would be willing to take over larger Debenhams units.

“It’s more space available on the market that we don’t need,” said one property insider. “I’m not sure there are the retailers to fill those stores. 

“I have a tenant lined up for one Debenhams store, but it’s only a small one. If you’ve got a 50,000 sq ft store then it will be a struggle to find a retailer to take that. Landlords will have to split them up, or possibly look at a complete redevelopment.”

Landlords Drapers spoke to said they would be willing to negotiate. One property source said: “A lot of property owners will want to engage with them. I don’t think they’ll be met with too much hostility.

“[Debenhams stores] are great big lumps of space, and they are going to be very expensive to carve up. Landlords will want to work with Debenhams to make it work.”

Another source added: “Closing a store and the costs of trying to reactivate the space is going to be very expensive. There are not many retailers in the market that would take 16,000 sq ft to 100,000 sq ft of space. The likelihood is that they’re going to be sub-divided, and there’s going to be significant costs to that. There will be some landlords that have the financial capability, and there will be others that may not.”

“Debenhams stores are regarded as anchor stores,” said another property source. “If they shut for however long it takes for the space to be reactivated, the subsequent effect on footfall could impact on adjoining tenants.”

The department store chain is also likely to use the opportunity to cut down some of its long leases. Currently, Debenhams stores have an average lease term of 18 years, with £4.3m of minimum lease payments over the next 20 years, data compiled by Hargreaves Lansdown shows.

”One of the very first things they’ll be going for in the process is to reduce some very long liabilities – some are 80-year leases,” said one property source. ”Even if you’ve got a successful business today, why would you commit the business to such long lease liabilities? That must be a drag on the business because they’re included in the accounts.”

Others argued that the pre-pack deal was in some ways reassuring: “It’s removed the uncertainty as to what is or isn’t going to happen to Debenhams,” one source pointed out. “[The board’s] eye has gone off the ball on the operational side. The most important thing for the customers and communities Debenhams is serving is that the management team now need to get back and focus on running a retail business.”


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