Debenhams Plc is an international multi-channel retailer with its origins in Britain. DEB has 250 department stores in 27 countries, and online in 60 countries. This analysis should be considered alongside the analysis for investing in the Debenhams Plc common stock.
This analysis is related to the last analysis on this website for the Debenhams Plc common stock. Whenever an analysis of a common stock shows up as good value I always look for other securities issued by an entity to see if there is any value elsewhere in the capital structure. In the case of Debenhams Plc there is a bond in the capital structure worth looking at.
One point to note about the bond is that it is classified as an ‘International Bond’. Any purchaser will need the assistance of a broker who can access the market for GBP bonds traded away from the CREST settlement system.
For a general answer for why investors would consider an investment of a bond over a common stock it is a good idea to refer to some comments in the ‘Intelligent Investor’. For this I would particularly recommend Chapter 10 of the 1972 version of the book titled ‘Security Analysis for the Lay Investor’.
In Chapter 10 the “Intelligent Investor” says that the security analyst “expresses an opinion as to the safety of the issue, if it is a bond or investment grade preferred stock, or to its attractiveness as a purchase, if it is a common stock.” This statement encapsulates the reason why an investor would look at a bond as an investment. The reason is “safety” in comparison with “attractiveness” when looking at common stocks.
The previous analysis posted on this website covers the “attractiveness” of the Debenhams Plc common stock. The safety of the Debenhams bond referred to in this post and the related analysis is assessed in a number of ways. The same Chapter 10 of the “Intelligent Investor” gives some guidance about how to assess the safety of a bond issues by a “retail concern”. Table 11-1 in Chapter 10 recommends an earnings coverage in comparison to interest payments of at least 5 times.
The “Intelligent Investor” recommends looking at earnings over the previous 7 years and taking an average and then comparing the earnings before income tax to “Total Fixed Charges” or a similar measure against a poor or the poorest year in the last 7 years.
Earnings at Debenhams Plc are currently quite low so the current year can be considered to be a poor year. However, Debenhams Plc is relatively conservatively financed and can easily cover “Total Fixed Charges”.
To find out if a value investor should consider an investment in Debenhams bond with a 5.25% coupon due in 2021 with ISIN XS1081972850 click here to download the new analysis.
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