Debenhams Prepares Prepack Administration With Lenders, Say Sources

(Bloomberg) -- Debenhams Plc is edging closer to giving lenders control in a move that would thwart efforts by its largest shareholder Mike Ashley to take the reins.

The struggling U.K. retailer is preparing a so-called prepackaged administration because billionaire Ashley’s Sports Direct International Plc hasn’t yet agreed to the lenders’ terms, according to people familiar with the matter, who asked not to be identified as talks are private. Sports Direct has until Monday to meet their requirements or risk losing its entire stake of about 30 percent.

Lenders are locked in a battle with Ashley as the company seeks to restructure about 720 million pounds ($938 million) of debt. Debenhams has demanded that Ashley make a “firm and binding” offer for the company after having rejected all of his previous proposals, including two attempts to extend loans, an offer to buy the company’s Danish stores and a possible purchase of Debenhams equity.

“Ashley has been backed into a corner,” said Neill Keaney, an analyst at CreditSights in London. “He tried to buy the company on the cheap and now, if he wants to get it, he’s being forced to pay up. Ashley has done everything short of putting his money where his mouth is and taking out his check book.”

Representatives for the parties declined to comment on the talks.

Court Process

Prepack administration is typically a court-based process that can allow creditors to take control in a pre-agreed plan while the company continues to operate as normal. It doesn’t require shareholder approval.

Debenhams gave Sports Direct an ultimatum on March 29: commit to a restructuring on the lenders’ terms or risk getting completely wiped out when they take control.

The lenders are withholding 99 million pounds of funding until either of two conditions are met. Sports Direct has to make a serious offer that includes “satisfactory arrangements” to refinance debt and provides the company with sufficient working capital. Alternatively, it could cancel its request for a special shareholder meeting to name Ashley as Debenhams’ chief executive officer and underwrite a rights issue or provide a subordinated loan on lender-agreed terms.

Shareholder Support

Sports Direct responded on Saturday, saying “a number” of Debenhams shareholders have expressed their support for Ashley to be named CEO and encouraged backers to contact the company. Sports Direct didn’t refer to Debenhams’ precise requests in its statement.

Ashley led an ouster of Debenhams’ chairman and CEO from the board in January, accused the company last month of misleading investors in its earnings reports and also started an effort dubbed Project Serpico to expose what he said is an insider plot to steer the retailer into the hands of hedge funds. He said last week that Debenhams’ advisers should be “put in prison.”

Lenders provided 200 million pounds of financing to the company last week after a 40 million-pound lifeline in February. The group includes hedge funds Alcentra and Silver Point Capital, along with banks Barclays Plc and Bank of Ireland Group Plc. Officials at all four firms declined to comment.

Investment firm Angelo Gordon & Co. and lender HSBC Holdings Plc recently left the group by selling their positions, other people familiar with the matter said.

Moody’s Investors Service downgraded Debenhams’ credit rating on Thursday to Ca, the second-lowest junk grade that it reserves for companies “in or very near default.” Moody’s said it’s become more likely that lenders will have to take losses in a debt-for-equity swap since they extended new credit facilities. S&P Global Ratings cut Debenhams to Selective Default the same day.

To contact the reporter on this story: Katie Linsell in London at klinsell@bloomberg.net

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Abigail Moses, Chris Vellacott

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