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Landlords give initial thumbs up to Debenhams CVA

Landlords are likely to vote in favour of Debenhams’ proposed company voluntary arrangement (CVA) and may use the negotiations to break up larger units, property experts have told Drapers. 

Debenhams has earmarked 22 stores for closure and a further 105 for rent reductions and lease negotiations as part of its CVA proposal, which it released earlier today.

“Landlords will vote it through provided there’s some flexibility to get space back and break it up,” predicted one property source. “Debenhams will be open to [that] because it will lower business rates and service charges.” 

The 105 stores up for negotiation have been split into three categories and rent reductions would vary from 25% to 50%.

“Broadly, the rent reductions seem suitable,” the source added. “With the proposed cuts they are coming down to a realistic market level and there really isn’t anyone else to take such large space.”

Renegotiated leases on those 105 stores would include mutual landlord/tenant break clauses, which would give Debenhams more flexibility to exit onerous agreements. 

One property expert said: “Some of the remaining stores will have long leases and these break clauses will mean they can be reduced further. They always said they wanted to reduce the stores by 50 in the longer term, and this will allow them to do that.” 

Some property experts expressed surprise over the 22 stores pegged for closure, which are: Altrincham, Ashford, Birmingham Fort, Canterbury, Chatham, Eastbourne, Folkestone, Great Yarmouth, Guildford, Kirkcaldy, Orpington, Slough, Southport, Southsea, Staines, Stockton, Walton, Wandsworth, Welwyn Garden City, Wimbledon, Witney and Wolverhampton.

“Wolverhampton is a new store, so that wasn’t expected,” said one source. ”I would have expected Northampton or some Scottish ones to be included.” 

Although landlords are glad of some clarity, the chief executive of retail property organisation Revo, Ed Cooke, warned that CVAs have a “poor success rate in returning businesses to profitability”: “All creditors and stakeholders should support that process – not just property owners. Many retail businesses are blaming all their woes on rent but, in fact, high levels of debt, a lack of investment and a failure to adapt quickly enough to changing consumer preferences are often far bigger issues.

“CVAs are the sticking plaster, not the cure, and have a poor success rate in returning businesses to profitability.”

Debenhams also revealed this morning that adjusted EBITDA dropped by 36.6% to £65.9m in the 26 weeks to 2 March. Like-for-like sales were down 5.2% and UK sales fell 5.4% and international sales dropped by 4.8%.

However, landlords will be encouraged by the £200m of new finance secured by the department store chain from existing lenders in March, one property source suggested.

“The recent debt-for-equity swaps and new equity in the business will bolster [landlords’] confidence in Debenhams as a viable business,” the source said. ”We could possibly expect more closures, around 40, but if they can get to 22 and cut down space and rents, it could be enough to turn the business around.”

The CVA, which will be put to a creditor vote on 9 May, must gain a majority creditor vote of 75% and requires more than 50% of unconnected creditors to vote in favour. 

 

 

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