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S&P downgrades Debenhams to CCC+ on weak Christmas sales, refinancing risks

S&P Global Ratings downgraded Debenhams PLC and its senior unsecured notes to CCC+ from B-, with a negative outlook, on weak Christmas sales and refinancing risks stemming from a £320 million credit facility due June 2020.

The U.K. department store operator's group like-for-like sales fell 3.4% during the six-week holiday period ended Jan. 5, while its U.K. outlets saw a sales decline of 3.6% due to weak footfall in physical stores. This heightens Debenhams' refinancing risks as it continues discussions with lenders, particularly about the revolving credit facility, the rating agency said Jan. 15.

The negative outlook highlights the possibility of further ratings downgrade in the next 12 months if the company is not able to refinance or if it launches a distressed restructuring transaction. The agency also could further downgrade the company if its liquidity worsens, it launches a company voluntary agreement or buys back portions of its bonds.

Debenhams had raised its annualized cost savings target for 2020 to at least £80 million from the previous £50 million. However, the rating agency warned that the cost cuts might not be enough to offset long-term sales and margins declines.

A "challenging" trading environment in the U.K., made worse by the likelihood of a "disorderly Brexit," means the company has to depend on favorable business conditions "outside its control" to be able to comfortably refinance its debt, the agency added.

These, coupled with the ongoing disagreements between Debenhams' board and shareholders, which led to the ouster of Chairman Ian Cheshire on Jan. 10, increase the company's refinancing risk.

S&P Global Ratings would revise the outlook to stable only if the company restores its competitive advantage despite the challenges.

Sky News reported Jan. 9 that Debenhams' lenders hired FTI Consulting Inc. to advise on the U.K chain's restructuring plans.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found here.