If you’ve followed the Debenhams story – and you look like the sort of inquisitive, business-savvy, reader who would – then like us you might have wondered at the abrupt summary agreed upon by most of the national media.
According to this received wisdom Debenhams was parceled up into a pre-pack administration and given to its existing creditors like a Christmas present in lieu of debts, neatly and with no loose ends. Yes, existing shareholders have lost their stakes, which in Sports Direct’s case was approx. £150m but otherwise it’s literally business as usual.
Now the smoke and debris has cleared a little, we can look a little closer at the deal; what it means to creditors and shareholders and why Mike Ashley’s dream of a High Street empire incorporating Sports Direct, House of Fraser and Debenhams might not be over after all – if he is willing to pay for it.
First a recap: On April 9th, Debenhams entered into a pre-packaged administration deal overseen by joint administrators FTI Consulting.
All of its existing assets, businesses and properties were transferred into a new holding company. This snappily-titled entity is called Celine UK Newco 1 Limited – and is entirely owned by Debenhams largest secured lenders. These include Barclays, Bank of Ireland and two US-based hedge funds – Silver Point Capital and GoldenTree Asset Management.
GoldenTree are a multi-national investor specialising in high-risk, high-reward investments. They bought Johnston Press in November 2018, publisher of the i newspaper and The Scotsman, from a similar pre-pack administration. GoldenTree were Johnston Press’s biggest creditor and they’ve followed a similar approach.
Silver Point Capital is a similar business describing itself as “a registered investment adviser focused on credit and special situations investments” of which this is one.
FTI will now look to finalise the sale of the new business to any interested parties for the best possible return. They told creditors: “The transaction delivers continuity for all group operations. It minimises business disruption, ensures continuity for the businesses and their suppliers and protects the group’s employees. It also allows additional funding of up to £99m to be provided.”
This is where the plot gets complicated
The additional funding mentioned there was part of a new loan agreement struck between Debenhams and creditors on March 29th. Along with a £40m secured bridge loan obtained in February, Debenhams also has £320m revolving credit facilities (RCF) and a further £200m of unsecured debt (the Notes).
This £560m of debt has proven to be an impediment to future profitability and a major millstone around their neck so they sought a further £200m of additional funding to help ease their financial pressures.
Now at this point you may recall that Sports Direct Chairman Mike Ashley, holder of just under 30% of Debenhams shares, offered to provide finance to the store with two offers of £150m and £200m. These offers both came with a string of additional conditions including convening an EGM, replacing all of the existing board bar one member and installing himself as the new Chief Executive Officer.
The strategy to add Debenhams to the Sports Direct empire was always an interesting one. They have already bought up several other distressed high street brands in the past couple of years including House of Fraser and Evans Cycles.
If one company had the buying power and sheer economies of scale that a combined Debenhams/HOF/SD retailer could command, then it might be enough to make the various savings and profits to clear Debenhams large debts and ultimately put it back into the black.
Remember that additional £200m of extra funding Debenhams wanted? Good. This was known as the New Money Facility Agreement, and came in two parts or tranches, which is French for part. Not sure why we use that instead of part but it’s just something you do when writing about money.
The first tranche (A) was an immediate injection of £101.25m which refinanced the £40m secured bridge loan, funded certain fees and provided additional working capital. The second tranche (B) of £98.75m was only to be made available under certain circumstances.
These were that i) Sports Direct announced an intention to make an offer for control of Debenhams and made arrangements satisfactory to the lenders for the financing of the Group’s working capital requirements and the repayment of any money drawn under tranche A of the New Money Facility Agreement, the RCF and the Notes, which would become due and payable as a result of the change of control provisions that would be triggered by this offer.
Or that ii) Sports Direct withdrew its request for an EGM, entered into a stabilisation agreement satisfactory to the lenders and agreed to either underwrite a new £200m share issue by Debenhams or provide a £200m long-dated subordinated debt instrument such as a bond or debenture..
An independent valuer, BDO, undertook an independent review of Debenham’s enterprise value which concluded that it was worth between £371m to £427m, which is lower than the amount of outstanding debt and other obligations including staff pensions.
This means that in order to achieve his ambition of owning Debenhams outright, Mike Ashley would have been required to have paid a fair purchase price for the group in addition to paying off up to £621.25m of debt.
Sports Direct would have been looking at spending over a hundred million pounds before they had sold so much as a pair of socks.
The remaining option would have seen them hand over £200m and, in a demand almost written exclusively for him (the stabilisation agreement), not make any more public pronouncements about the company or jeopardize any potential rights issue in any way.
Given these hurdles, discretion might prove the better part of valour and while the angry CEO might fulminate against the “national scandal” of a British institution falling into foreign hands and even look at bringing legal action against the administrators, in reality there is still nothing to stop him owning the organisation, if he literally pays the price.
FTI said: “We are entirely satisfied that the sale was in the best interests of the company and its creditors” adding that Sports Direct had been invited to participate in the sale process. “We are officers of the court and have a duty to act in the best interest of Debenhams plc and its creditors. We strongly refute our actions in undertaking a sale for the benefit of the company’s creditors were subject to any conflict of interest.
They threw additional shade: “We understand that Sports Direct as a shareholder will be disappointed that there is no value in the equity. However, the transaction delivers continuity for all group operations and was in the best interests of the group’s creditors, employees, customers, pension holders and suppliers.”
Legally FTI are bound by the Insolvency Code of Ethics and guided by Statement of Insolvency Practice 1 (SIP 1) as are we and all insolvency practitioners.
They state: “Prior to our appointment we considered potential ethical threats in undertaking the administration in accordance with the Code, and we did not consider that there were any matters preventing us taking this appointment.”
Chris Horner, Robson Scott Insolvency Director, said: “The Debenhams story is interesting for many reasons. Firstly that so many news organisations took the idea that Debenhams simply fell into a pre-packed CVA and left it at that, rather than looking at what actually happened and what could happen next.
“It’s unusual but also predictable that we’re seeing a more aggressive form of asset management taking place from creditors today, especially with such large sums involved – over £500m. .
“Previously creditors may have been happy to remain in a back seat, allowing events to play out but tightening lending requirements, economic warning lights and a more cautious approach, but here they have taken the lead.
“The creditors’ own team chose the insolvency practitioners ahead of the administration process and chose the quickest way to take ownership of the assets themselves through the new company. This gives them control and executive decision making capability.
“It’s also an interesting role-reversal for the main shareholder Sports Direct. They are usually the ones with the financial muscle and relative corporate agility to purchase companies quickly for prices they consider favourable which shareholders of those companies might disagree with.
“Now the opposite has happened. The owners of the new Debenhams company, the creditors, can decide whatever they want to charge Sports Direct or any other buyer. From a financial point of view it’s like seeing Floyd Mayweather getting outboxed and forced into a corner – it never happens.”