Debenhams shocks with £200m loan plan, Sports Direct has other ideas

Debenhams shares collapsed 64% to 1p on Friday as the department store group announced plans for a new fundraising, bringing a swift response from its largest shareholder, Sports Direct.

The group applied for permission from bondholders to amend terms of existing notes so that it can negotiate more borrowings but warned that if some of the options materialise it "would result in no equity value for the company's current shareholders".

Among the changes sought from holders of its bonds due in 2021, is the permission to allow the company arrange new money facilities of up to £200m from its existing lenders and bondholders, which include Barclays, HSBC and hedge fund Silver Point. Other permissions were sought to put in place inter-creditor arrangements and to grant collateral to support certain of the company's existing debt.

Debenhams, which had net debt of £286m as of 5 January and a committed debt facility of £520m that expires next year, said: "A successful consent solicitation would allow the company to enter into new money facilities and give Debenhams the ability to pursue restructuring options to secure the future of the business."

Earlier this month, the company said it was in advanced talks with its lenders about additional facilities of "approximately £150m" as it looks to agree a long-term restructuring.

Analysts suggest management will try to secure a company voluntary arrangement that could involve the closure of 20 to 50 stores, with rent reductions across its 166-store estate, while other reports suggest a pre-pack administration is the preferred option of lenders.

As seen last week at Interserve, a pre-pack administration, which does not require shareholder approval, would wipe out current shareholders and prevent Sports Direct from gaining control, while allowing Debenhams to continue to trade as a new entity owned by its lenders.

NEW SPORTS DIRECT PROPOSAL

Sports Direct, which owns a 30% stake, had this month offered a £150m loan in connection with a demand for a general meeting of Debenhams to remove all but one of the current members of the board and appoint Mike Ashley as its new chief executive.

Less than an hour after Debenhams' announcement, Sports Direct came out with a new offer to acquire Debenham's Danish chain, Magasin Du Nord, for £100m cash.

Ashley, who in January ousted Debenhams chairman Ian Cheshire and removed CEO Sergio Bucher from the board after three profit warnings in the past year, invited Debenhams to provide further details of its valuation of Magasin Du Nord if it thinks £100m is not a fair price.

The deal would include an option where Debenhams had 12 months to buy back the chain at the same price at which it was sold and would also have the right to continue to market the business and gain any further benefit if it were sold to a third party in that 12-month period.

Ashley again pushed for Debenhams to make him CEO "to assist Debenhams through its restructuring process" and said his proposal "would provide additional management and first class leadership to Debenhams through this challenging period of restructuring, together with additional funding".

At 1030 GMT, the shares were down 31% on the day to 2p.

Market analyst Neil Wilson at Markets.com said the plan to restructure its debt could effectively wipe out shareholders.

"After the downbeat trading performance post-Christmas, it looks as though the company requires more cash than previously thought.

"If it proceeds on this course there would no equity value left for existing shareholders. Management is taking pretty drastic action here."

Wilson wondered if Ashley’s offer of a £150m loan was "admittedly bitter medicine" but might be "an easier pill to swallow".