FT article16 Jul 2018 22:18
https://www.ft.com/content/f7aed72c-88e7-11e8-bf9e-8771d5404543
Debenhams dividend in jeopardy as retailer fights tough market
Challenging trading conditions and revised credit put pressure on department store
July 16, 2018
Debenhams faced the prospect of having to cut its dividend after the department store was hit by a combination of prolonged difficult trading conditions and a revision of some trade credit insurance terms.
The group’s heavily shorted shares fell sharply at the open on Monday, though they later recovered slightly to be down 6.5 per cent at 13.75p by mid-afternoon in London.
The drop followed weekend reports that three providers of trade credit insurance to suppliers had tightened their terms in response to Debenhams’ financial position and current trading. Debenhams’ senior unsecured debt traded 4 per cent lower, at 81p in the pound.
People familiar with the company said over the past few weeks that one insurer had reduced its cover levels while two others were not extending cover to new suppliers.
In a statement, Debenhams said its balance sheet and cash position were healthy. “All the credit insurers continue to provide cover to our suppliers and we maintain a constructive relationship with them,” it added.
Lower levels of trade credit insurance mean that companies must pay for more goods up front, resulting in more cash flowing out of the business and more capital tied up financing inventory.
Michelle Wilson, an analyst at Berenberg, said that if average creditor days — which measure amounts owed as a percentage of the total cost of goods — fell by 30 days from their current level of 107, it would cause an cash outflow of £100m and could put one of the group’s debt covenants at risk of breach.
At its half-year results in April, Debenhams had cash of £40m and had drawn down only £84m of a £320m bank credit facility. However, just two months later it issued its third profit warning of 2018, citing challenging conditions.
Scrapping its full-year dividend — a 1p a share payout is forecast — would save around £12m. Its Magasin du Nord operation in Denmark, currently up for sale, could fetch over £100m but would also reduce profit.
Adam Tomlinson at Liberum said it was likely that the full-year dividend would have to go, given that it was not covered by free cash flow. The company already reduced its half-year payout but declined to comment on its intentions for the full year.
“Could we see something more drastic, such as a company voluntary arrangement? It is certainly not out of the question,” said Mr Tomlinson. CVAs reduce retailers’ rent bills and allow them to close unprofitable stores, giving them some respite from adverse market conditions.
The loss of trade credit insurance is not necessarily terminal, analysts pointed out. Fashion retailer New Look, which is currently in a CVA and carrying a greater debt burden than Debenhams, has operated with reduced supplier cover for around a year.
Debenhams
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