David Jones Takeover Talk, page-46

I've been holding back on some info for a bit now. Myer will be smashed in early 2019... why? Because of IFRS 16 - the new leases standard.

The new requirements eliminate nearly all off balance sheet accounting for lessees and redefine many commonly used financial metrics such as the gearing ratio, leverage and EBITDA. This will increase comparability, but may also affect covenants, credit ratings, borrowing costs and risk.

Once Myers $2.7b worth of leases are included on the balance sheet as liabilities, their leverage covenant of 2.5x will be breached (current 0.6x in FY17 to 12x in FY19). They may be able to request whats called "a freeze" but that just delays the inevitable. I don't see shorter's disappearing anytime soon. Also, this makes Myer less attractive as a takeover target as operating leases are now included as debt and increases the perceived risk of the business, hence less banks will lend to them making growth acquisitions difficult.

TLDR: Myers balance sheet looks ok since all its leases are off balance sheet. On January 2019, the $2.7b in leases that are off balance sheet have to be included on the balance sheet as liabilities.