Update on Debenhams CVA
It has been reported that Atradius has completely withdrawn all credit insurance to the suppliers of Debenhams. This is a move that will alarm the retail sector as Debenhams is struggling but it by no means at risk of immediate insolvency. The problem is that the withdrawal of cover can cause a cash crunch as suppliers demand payment up front. One of the test of insolvency is the cashflow test. So even if the company is profitable it can still become insolvent. That said it does look like the credit insurers are reducing their exposure in the retail sector as this comes just a couple of weeks after Arcadia, the company run by the Tycoon Sir Philip Green, also had its cover withdrawn.
The Telegraph reported last night that Debenhams is considering a CVA after bringing in KPMG restructuring team. Of course a CVA is the more radical of all the options probably being considered and the sources close to the company have been divided in what they say is happening. This reflects the view in the City as some investors are playing down the risks and others are asking for radical action to improve the fortunes of the company.
One thing for sure is that Michael Ashley is closely watching developments as the biggest shareholder in Debenhams, although he has his hands full with House of Fraser, that he bought out of administration following their CVA.
CVAs have been deployed repeatedly this year as a vicious downturn grips the high street. Any attempts by Debenhams to shed stores may be complicated by its corporate structure. The retailer’s property leases are held under several companies, which could force it to undertake more than one CVA at the same time.
The company has said that it asks lots of consultants to advise and not too much should be read into the appointment of KPMG.
Debenhams have said they expect to have £320m of debt by the end of the year and it now expects pre-tax profits of £35m to £40m, down from £59m last year.
A company should really be insolvent before attempting a CVA otherwise it can be seen to be using the mechanism to stitch up landlords. Understandably landlords are getting fed up.
Categories: What is a CVA or Company voluntary arrangement?