Restructuring In the first article, Mike Jervis argues that following the numerous high-profile insolvencies of the past months, it is more vital than ever that landlords follow certain rules when dealing with restructuring tenants
In restructurings, whether they concern Greek sovereign debt or a 100-store retailer, insolvency practitioners should always remember the five immutable commandments: (1) the need to engage with all stakeholders; (2) the business is worth more as a going than a gone concern; (3) stakeholders should be provided with robust, common financial information on the position of the company and its forecasts – this gives practitioners a better chance of a successful restructuring; (4) it is vital to act quickly or the likelihood of failure will significantly increase; and (5) following commandments 1 to 4 will engender more trust in the practitioner’s plan and result in a higher chance of success.
Recent survey
PricewaterhouseCoopers (PwC) has recently worked with eight high-profile failed or struggling high street retailers and found that, on average, 51% of the total store portfolio has or could be closed when restructuring starts to bite.
Furthermore, its analysis of retail insolvencies showed an increase in the second quarter of 2011 of 9%, compared to the same quarter of 2010. These numbers are grim considering that the overall trend across all sectors is flat. Looking at these figures in further detail, it became apparent that there were 41 insolvent retailers with assets more than £1m in the second quarter of 2011, compared to only six in the same period of 2010.
This trend does not concern only retail but can be observed in numerous businesses with multi-site operations: for example, hospitality and leisure insolvencies increased by 10.4% over the same quarters. Bankers have expressed concern that hotels are one of the big issue sectors and the disturbing trends in the care home sector are well documented.
A new breed
Landlords have become one of the new breeds of lenders. A few years ago, pension scheme trustees were identified as a new type of lender, normally on an involuntary basis, where their schemes had issues such as deficits, low interest rates and people living longer. Pension trustees have (rightly) been proactive in the restructuring market since legislative changes contained in the Pensions Act 2004, and this has assisted them by ensuring that not much money is available.
Have landlords done the same? Money is available in restructurings and compromises for distressed tenants. Has an assessment or negotiation of how much landlords receive when tenants are looking to exit leases taken place? Is there a true sharing of the additional enterprise value created in the business by exiting loss making sites? Have the business’ prospects really been understood?
If not, why not? How often have landlords organised themselves as a creditor group to undertake a robust review of the restructuring plan presented by a tenant group? The restructuring plan could involve a deal to compromise rents, possibly through a consensual arrangement or a company voluntary agreement (CVA) and it can often be accompanied by a rights issue or the renewal of banking facilities.
Nightmare scenario
Landlords often consider that they are not provided with the information they require in order to assess a plan. Imagine a landlord that receives a CVA proposal of more than 100 pages and has only 10 days to read it. It wants to meet the CFO of the business in question but the latter is unavailable for two months (by which time the CVA should have been approved) because he is fending off creditors, having left the restructuring to the last minute. Worse still, pity the landlord that reads about that tenant’s difficulties in the trade press for the first time.
A matter of co-operation
Landlords must engage with tenants at an earlier stage. They should ask their tenants to prepare a business plan and test it for different environments.
Tenants should disclose the prospects for capital raising and use the plan as an opportunity to engage with the landlords, which represent one of the largest stakeholder groups. If the tenant is proposing different tranching of stores, landlords should ask them to explain why and how as part of an overall strategy.
Tenants can also benefit from this approach. Explaining the position to different stakeholders as part of a well-thought restructuring proposal at an early stage will enhance the likelihood of success. Treating landlords as lenders, perhaps about to become so on an involuntary basis, provides the opportunity to communicate with them as a wider group. It also deals with some of the requirements for directors when considering their duties when trading in the “the twilight zone”.
Not time to waste
In conclusion, parties should engage with each other in a controlled environment, early in the process, rather than at the end when time is tight, tempers are frayed, trust may have broken down and there is no money left.
Mike Jervis is a partner in the business restructuring services part of PwC
