Morgan Stanley has downgraded Debenhams’ price target and rating from ‘overweight’ to ‘equalweight’ due to pension deficit concerns.

While the bank predicts that Debenhams’ preliminary results, which will be published next week, will be largely flat, it also believes that this will be overshadowed by the emergence of a pension deficit that exceeds £200m.

As a result of this prediction, Morgan Stanley has reduced the Debenhams price target from 95p to 70p per share.

The bank noted that its rating and price target are based on the assumption of a £250m deficit.

"Given the lack of visibility on the underlying assets in the pension scheme, this assumption may turn out to be wide of the mark when the company reports next week," Morgan Stanley said.

In its research published yesterday, Morgan Stanley also suggested that Debenhams’ results may present a “very material funding gap” in its pension scheme.

Debenhams’ pension scheme had a surplus of £26m at the end of the full year 2014/15, however recent fluctuations in bond yields have lead the bank to suggest that the scheme’s liabilities may have grown by more than £300m over the last year. As a result of this, Morgan Stanley has predicted that the company may disclose a net pension deficit of more than £200m.

"When Debenhams reports its prelims next Thursday, we expect the operating results to be routine. We are concerned, however, that these may be overshadowed by the emergence of a material pension deficit," the bank added.

This morning, Debenhams shares were down 2 per cent to 54.10p.

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