Debenhams CVA terms threaten local authority revenues

Debenhams, which has seen its lenders take control of the troubled high street chain, has had its company voluntary arrangement (CVA) approved by creditors and will be closing 22 stores by early next year, raising the prospect of local authorities losing an estimated £8.5m in business rates

In a bid to put the company on a stable financial footing and secure its future by moving to a strategy of a smaller footprint and higher quality stores, in April Debenhams proposed two CVAs: one relating to Debenhams Retail Ltd, the main trading entity; and one for Debenhams Properties Ltd.

These have now been agreed ‘with a majority significantly above the required threshold of 75% on each proposal’ at an extraordinary shareholders meeting, the company said.

The CVA proposals are designed provide a mechanism to restructure the store estate in line with the plan outlined by management in October 2018 to reduce the current 166 UK store portfolio by closing around 50 stores.

Under the proposals, all Debenhams stores will remain open during 2019, including through Christmas peak trading. Subsequently up to 22 stores will close in early 2020, putting around 1,200 jobs at risk. The CVA has also renegotiated rents with some property landlords, which will see rents lowered for 105 stores.

Terry Duddy, executive chairman of Debenhams said: ‘We will continue to work to preserve as many stores and jobs as possible through this process. This is a further important step to give us the platform to deliver a turnaround.’

However, John Webber, head of business rates at Colliers International, described Debenhams' successful CVA as a ‘double edged sword’, saying ‘it sets an uneasy precedent for the finances of local authorities which have similar struggling retailers in their boroughs’.

Colliers understands that in its CVA proposals, Debenhams had categorised its properties into five groupings and now plans to reduce its rates bill in two of these categories (category 4 and 5) by around 50% in the current billing year, backdated to 9 May 2019. Such properties have been referred to as ‘materially underperforming’ (category 4) and in ‘smaller, weaker tertiary retail centres’ (category 5).

Colliers estimate that this measure will impact on 59 local authorities which will lose out on £8.5m of the £17.3m rates bills Debenhams should have been paying on the properties in these categories, this billing year.

Particularly hard hit will be the local authority in Newcastle-upon-Tyne for example which will lose over £543,000 this year of the £1.169m it was expecting to receive, Guildford who will lose £446,070 from the £811,440 it was expecting and Hammersmith and Fulham (Westfield shopping centre) will lose over £715,000 of the £1.54m it should have received in the same period.

Webber said that while Debenhams claimed its new arrangements will offer a better return for the rating authority than going into administration, there were other issues to consider.

‘In the long run, if by using a CVA a retailer is let off the hook of some of its business rates liabilities and this practice is followed by other struggling retailers, we will see the public purse massively compromised. Local authorities will not have the funds they have budgeted for to run local services, which we already know are tightly stretched.

‘On the business side we may see the emergence of a two-tier high street with those stores who have been run efficiently and have embraced the changing retail market place paying much higher rents and rates, than those like Debenhams who have not followed such a prudent path.

‘The well run will be subsidising the poorly run,’ Webber warned.

Chad Griffin, Simon Kirkhope and Andrew Johnson of FTI Consulting were appointed as joint administrators to Debenhams on 9 April, and immediately sold the company’s shares in the group to Celine Newco 1 Ltd, an entity owned by certain of the company’s secured lenders.

There followed a marketing process, which attracted a bid from major shareholder Mike Ashley of Sport Direct, which was rejected.  The administrators said they considered the bids received were not at the level required to be taken forward and therefore the ownership of the Debenhams Group remains with Celine.

Stefaan Vansteenkiste, chief revenue officer (CRO), representing Celine, said: ‘The investor consortium is a committed long-term owner, which has provided Debenhams with £200m in fresh funding for the financial restructuring process and to fund the company's operating turnaround. Within the consortium, there is extensive turnaround experience, which we will deploy to support the management's plan and to position Debenhams for a long-term successful future.’

Pat Sweet

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