Debenhams hasn't said how it will exit administration or who will bear losses
The management of Debenhams clearly believe the business is either insolvent or likely to become so in very near future.
They argue administration will give the company the protection it needs “from the threat of legal action” by its creditors, while its 142 stores are closed as a result of the Covid-19 restrictions.
Its creditors have reason to be upset. The company is refusing to pay rent for the next five months and it is in the process asking its landlords to agree to yet another round of significant, permanent rent reductions.
Landlords worry that the plan here is to walk away from leases.
Suppliers worry that Debenhams will use administration as a means of avoiding paying for summer stock that it has ordered and will now struggle to sell.
Debenhams says it will pay suppliers who “continue to provide goods and services during the administration”. This offers some guarantees for new orders but, crucially, not for any goods or services already delivered.
Debenhams say they have put the business into administration to protect it from legal action by its creditors, ITV News Business Editor Joel Hills explains
The truth is that an awful lot remains unclear. Debenhams hasn’t said how it plans to exit administration or who will be expected to bear the losses when it does.
And it isn’t clear if the owners of the business, a consortium of hedge funds and banks lead by Silver Point Capital, will be among the losers. Silver Point bought a considerable amount of Debenhams debt at a discount. Is it prepared to accept a cash loss on its investment?
In the last year, Debenhams has closed 22 stores. A further 28 are expected to shut in the next twelve months.
Tonight, a source close to Debenhams insisted "there isn’t a new store closure programme" but admits "a handful of extra stores may need to close," depending on the outcome of talks with landlords.
In a statement, its chief executive, Stefaan Vansteenkiste, said: "We are striving to protect jobs and reopen as many Debenhams stores for trading as we can, as soon as this is possible."
Debenhams is up against it and it isn’t alone. Retailers like New Look and Sir Philip Green’s Arcadia Group say they are struggling to pay rent. The big shopping centre owners, Intu and Hammerson, have said they are struggling to collect it.
The longer the retail sector remains locked down, the more likely it is retailers will fail.