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What does Debenhams' administration mean for creditors?

Suppliers have expressed concerns about Debenhams’ long-term future as the beleaguered department store chain prepares to enter administration amid the economic pressures of the coronavirus epidemic. 

Earlier today Debenhams filed a notice of intent to appoint administrators to protect it from the threat of legal action that could have pushed the business into insolvency.

The retailer said it would carry out a “light touch” administration whereby the existing management team will remain in place under the control and supervision of administrators.

“This is not about Debenhams going away – it’s about giving Debenhams a future and protecting the business, stores and jobs through this administration process,” a source close to Debenhams told Drapers.

“The intention very much is once the government allows stores to reopen, it will come out of administration, stores will be reopened for trading, the staff that are on furlough at the moment will come back into the business and there will be extra money injected by the current owners and lenders.”

Negotiations with landlords over rents are ongoing. However, these may result in a handful of cases where agreements cannot be reached, Drapers understands. 

Twenty-eight stores remain earmarked for closure as part of last year’s CVA, which are now not expected to close until after peak trading. This will result in Debenhams having around 100 UK stores in total.  

Another source close to the situation agreed: “Debenhams is dividing up its store portfolio into two sections, including stores where landlords are happy to help with rent negotiations and those who aren’t helping.”

He added that the refreshed administration is not expected to result in additional stores closures. 

Debenhams closed its 140 UK stores on 23 March, the same day as the government announced the closure of all “non-essential” shops. However, its website is still operating. 

Simon Underwood, business recovery partner at accountancy firm Menzies, commented: ”The decision to place the business in administration will provide some protection and help to hold off creditors for the time being.

“This will effectively buy the retailer some time, so more permanent decisions about how to proceed with the current restructuring plan can be made once the trading outlook becomes clearer. 

“While the government has moved quickly to relax some insolvency laws (on 28 March), specifically measures linked to ‘wrongful trading’, further legislative changes to introduce a ‘breathing space moratorium’ are still awaited. Debenhams has decided to take matters into its own hands.”

Several industry sources agree that placing Debenhams into administration for the second time within 12 months will “tide it over” for now, but believe management is merely postponing its “inevitable” collapse. 

The department store chain initially entered administration in April 2019 and officially launched its company voluntary arrangement later the same month. Its CVA proposals, which included rent cuts of 25% to 50% on some stores, were approved last May. 

Under the CVA, Debenhams is expected to close a total of 50 stores, 22 of which shut in January. The retailer has been in continuing discussions with landlords to determine the next tranche of closures, and how to give the remainder of its stores a sustainable cost base. 

A senior source at one brand stocked by Debenhams said: “The department store chain was in already trouble before the Covid-19 pandemic hit, and its long-term future remains bleak. 

“It was already teetering on the edge, but the reality is that it was built on sand. This is just delaying its inevitable demise. 

“The stores felt tired and they were such heavy discounters, and always going on promotion, which was arguably damaging the high street. However, it will be even more damaging for the high street if there are big, empty stores left to fill.” 

A source close to the situation responded: ”The owners are only doing this because they believe the business can have a sustainable future.”

Another high street retailer agreed that its demise will negatively impact the high street: “I think that another administration of Debenhams will have a huge impact on some locations that rely on major department stores to stay and keep the high street going.

“It will also impact employees, as there [may] be more job cuts.”

Most of Debenhams’ store staff have been furloughed until stores are permitted to reopen. 

As part of the proposed administration, Debenhams said payments to suppliers who continue to provide goods and services, including fashion suppliers, will remain “unaffected” and be paid in accordance with their terms. 

To combat the fallout of coronavirus, Debenhams extended its payment terms to wholesale suppliers by 30 days and deferred all historic concession balances for 30 days. Administrators will act on behalf of creditors owed money, but there is no guarantee of full payment.

A letter to Debenhams suppliers said: “The moratorium means that outstanding payments are frozen until such time we can agree a future payment schedule with you. Payments to suppliers who continue to provide goods and services during the administration will remain unaffected and be paid to terms.”

 “My personal opinion is that suppliers will totally lose confidence in Debenhams. I can’t see why suppliers would supply them again,” one former Debenhams supplier said. “They certainly wouldn’t be on my customer target list.”

Another Debenhams supplier was similarly pessimistic: “It is time for this particular fascia to leave the high street. While Covid-19 is a challenge for all retailers, is it right or commercial for a retailer to seek restructuring arrangements again and again? On each occasion stakeholders and, more importantly in my view, suppliers, experience damaging losses.”

Another supplier said “big decisions” will need to be taken about moving forward: “Last year we weren’t hit at all when Debenhams launched a company voluntary arrangement – we were all paid in the normal way. But we don’t know what will happen this time around, and it’s worrying. Will it be a pre-pack administration or another CVA? We don’t know what it will look like.”

He added: “We have to decide whether we want to supply them or not. We need to know if they are going to try and find some mechanism where suppliers are protected. If they are trying to find a way to protect the main supply base, then we will be supportive.” 

Debenhams declined to comment. 

 

Readers' comments (2)

  • The Debenhams end game continues...

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  • Unlikely post admin suppliers will get paid they will be unsecured creditors and will get paid during administration for goods and services supplied during the administration, After that who knows !

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