A massive reorganisation at department store chain Debenhams could take up to two years after it spiralled into administration last week.
The £2.3billion turnover company plans to close as many as 50 of its 165 stores in a sweeping change that will see it cast off debts and scrap leases.
Last week, lenders used their power as chief creditors to take control despite irate protests from Sports Direct founder Mike Ashley who watched his 29.9 per cent shareholding evaporate in the insolvency of the parent firm.
A massive reorganisation at department store chain Debenhams could take up to two years
The size of the stores and the complexity of the business compared with other retailers makes it likely the new owners will remain with the business until it is clear to potential new buyers that it has a sustainable future, sources told The Mail on Sunday.
The investment is a sizeable bet on the UK retail market and a business model that has been increasingly dogged by claims it has been eclipsed by online shopping.
Lenders include American hedge funds Silver Point Capital and Golden Tree Asset Management.
Bank of America, Bank of Ireland, Barclays, HSBC and Alcentra, a subsidiary of Bank of New York Mellon, are also creditors. They are expected to sell some peripheral assets such as the group’s Danish department store business Magasin Du Nord.
But the new owners – the lenders – are also understood to be planning a second, more detailed, insolvency – called a Company Voluntary Arrangement – for the part of the business which holds the store leases.
At that point it can approach landlords and ask to scrap leases or remove onerous clauses that force it to pay rising rents for decades.
Mike Ashley watched his shareholding evaporate in the insolvency of the parent firm
One source familiar with the administration process said: ‘The good thing is that Debenhams, unlike a lot of other retailers that have hit trouble, now has time to sort this out.
‘Despite the noise, which has largely come from Mike Ashley who is understandably sad to lose his shares, this is now being done in a very orderly manner.’
All the stores are expected to stay open until Christmas. Stores earmarked for closure will then begin to be shuttered in pockets. But because of the huge amounts of stock involved, the winding-down process will take many months, possibly into the beginning of 2021.
Debenhams’ troubles can be traced back to 2003 when it was bought by a private equity consortium including CVC, Texas Pacific, Merrill Lynch Global Private Equity and management.
It was sold just three years later after the buyers had awarded themselves a bumper payday. But the company was saddled with extended rent contracts that spanned 30 or 40 years and stipulated payments would only ever rise.
One insider said: ‘The problem with Debenhams is the leases. The group has an average lease period of 19 years with rising payments. In retail these days that’s shocking.’
The average in many other high street chains has dropped significantly.
Many have average leases of less than ten or even five years across hundreds of stores. The source added: ‘Under private equity owners the leases were all extended to 30 years or more. In return they took a capital injection from landlords, refinanced it and left.’
Some estimates suggested at the time they made almost £2billion, more than three times their initial £600million equity investment. They also left Debenhams with £1billion of debt. Last week was, many in retail say, inevitable.
One silver lining is that American investors Silver Point and Golden Tree have some form as supportive owners.
They were among five hedge funds to rescue Co-operative Bank two years ago and have been long-term investors having stepped in for the original 2013 bailout.
Employees can also take heart that Debenhams is almost, in retail terms at least, too big to fail.
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