Third Time (Un)Lucky: Debenhams to file for bankruptcy
April 29, 2020
2 min read
What's going on here?
Debenhams prepares to file for bankruptcy after formally appointing restructuring firm FRP Advisory to act as administrator.
What does this mean?
Debenhams is set to enter its third insolvency process in a year, after filing for administration on 9 April 2020. This gives the group 10 days to secure a rescue deal. If unsuccessful, it will likely have to file for bankruptcy to help override its £600m debt. The group wrote to landlords asking for a five-month rent holiday. It has also asked suppliers for a one-month delay to payments in an effort to preserve cash. These requests may, however, lead to legal action being brought forward by their landlord and suppliers.
Debenhams had been struggling prior to the lockdown. It entered its first administration period last April. At the same time, it was removed from the stock exchange. The result of last April’s administration was the closure of 20 stores. It planned to close another 28 but did not follow through. This is likely to take place following this year’s administration.
What's the big picture effect?
This story is a good analysis of the retail industry crisis in the United Kingdom. Shopping habits have heavily shifted towards the internet. Therefore, companies unprepared for this change have been struggling to make up for the revenue loss. 2019 was the worst year ever for British retail, with total sales falling by 1.5%. This is the lowest number recorded, according to advisory firm KPMG. Prior to 2019, figures had been steadily declining. However, last year was the first time profits fell by more than 1%. The coronavirus outbreak has only intensified this, triggering the industry’s biggest struggle in decades. An estimated £10bn in clothing has piled up in warehouses, even with sales continuing online. This means that Debenhams will likely not survive the year without a significant rescue deal.
The stocks piling up are likely to be a huge indicator on the effect that fast fashion has on the economy. With the spring/summer season cancelled, retailers will try to reuse stock next year. But it is likely that current styles will no longer appeal to customers. Retailers will have to cut prices to try to generate profit.
The struggle extends to landlords as well. Intu, whose malls include Debenhams, earlier this month abandoned issuing a share intended to support its own finances. Its share price has now fallen to just 4.25 pence. Debenhams is relying on debt being written off to survive the outbreak. It is uncertain whether landlords will have the funds to provide this aid.
Debenhams will hope it can secure a rescue deal. This would buy the company enough time to devise a plan on how to manage its debts in a future post-coronavirus world. With its recent widespread store closures and the further debts that will be accumulated by threatened legal action, a collapse seems likely even with a significant rescue deal.
Report written by Andreea Dicu
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