Feb 12, 2019
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Debenhams gets £40m cash injection, agrees sourcing deal with Li & Fung

Feb 12, 2019

Debenhams has secured a much-needed cash injection of about £40 million as it continues to work through the process of reaching a longer-term deal with its lenders. And it also has a new sourcing deal with Li & Fung that it says will help it respond to trends/customer demands more quickly and offer better quality.


First the funding. The announcement came in fairly dry terms on Tuesday with the company saying it has “an additional 12-month senior secured credit facility with certain of our current Revolving Credit Facility ‘RCF’ lenders and Noteholders, together with the waiver and amendment of certain RCF covenants. This additional facility fully utilises permissions within the terms of the current RCF and the Notes and provides £40 million of increased liquidity headroom, available to draw as required.”

What that means in practice is that it will avoid breaching its debt terms. It represents a crucial lifeline for the struggling firm that issued as many as three profit warnings in 2018 and could close as many as 20 stores this year.

The deal will also see the current £520 million borrowing facilities being extended as talks with lenders go on about a longer-term arrangement.

And the Li & Fung agreement? At the same time as it announced the funding deal, it said it continues to “make operational improvements to support the business turnaround under the Redesigned strategy.”

To that end, it has entered an agreement in principle with Li & Fung to develop a strategic sourcing partnership. This is expected to cover a material part of its own-brand sourcing over time and “will deliver benefits for both our customers and our stakeholders, through improved product quality and lead-times; higher achieved margins; and better working capital efficiency. Initial orders under the agreement are expected to commence shortly.”

CEO Sergio Bucher said the agreement “gives us access to state-of-the-art technology in the LF Digital platform, providing end-to-end visibility across our supply chain. This will help us anticipate and respond more quickly to trends and our customers' preferences, as well as delivering better quality product.”

All good news, but the developments still leave the company facing a perilous future as there’s speculation its long-term store closure plan (reportedly involving anything from 50 to 90 stores) could require an insolvency deal in order to facilitate many of those closures.

The company has 165 stores at present, many of them under-performing. Its locations range from an Oxford Street mega flagship to numerous mini suburban stores selling a severely limited edit of its overall offer.

It has struggled along with other mid-market department stores and continues to do so, despite the fact that its biggest rival House of Fraser has also been on the back foot in the past year. It doesn’t seem to have been able to capitalise of HoF’s weakness.

There's speculation that the negotiation of a new long-term funding deal could see its lenders taking a stake in the business. The company had already turned down a £40 million loan from major shareholder Sports Direct because of the conditions attached that would have given the Mike Ashley-led company the right to add another 10% to its almost-30% without making a formal takeover bid for the company. Takeover Panel rules mean that a 29.9% stake should trigger a bid.

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