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Tuesday, 14 April 2009

Company Voluntary Arrangement for JJB Sports - technical issues with landlords.

Nicely written article about the use of a company voluntary arrangement (CVA - click for quick guide) by Sarah Butler in the Times yesterday. At last someone has spent time researching the subject well and presenting a piece that takes in the views of one of the top retail turnaround experts, Sir David Jones (Next and Morrisons).

Ms Butler has asked the key questions - what is the CVA deal, what are the aims, what do creditors think? I understand from her article that the CVA is proposing that the leases for 140 closed and unwanted stores are determined in exchange for 6 months rent, about £10m.

As we constantly tell people the CVA is a very powerful tool to determine leases and contracts such as management contracts, employment contracts, leases and HP agreements. However, in JJB's case I suspect that the advisors have had to carefully balance the shop lease determinations with pragmatism. WHY?

Under the case law that guides CVA practitioners (Re: Doorbar v Alltime Securities Ltd (1995) BCC 1149 and Re Park Air Services plc (1997)) the claims of the landlords once the lease is determined can be quite substantial. Without going into too much detail here, the basic rule of thumb is the landlord can VOTE in the CVA for the expected period of void.

For example if a RICS qualified surveyor thought the shop property would take 12 months to re-let (possibly with rent free periods) then the landlord is able to vote in the CVA process for the equivalent of 12 months rent. If the surveyor advising the CVA practitioners and or the landlord estimates that the current rack rental being paid by the company entering CVA, is now unobtainable, the landlord can VOTE for the difference between current rack rental and future expected rack rental.

So (I surmise) that, with 140 shop landlord claiming 6-12 months PLUS the lower rental differentials, their combined voting power will be enough to control the outcome of the CVA creditors meeting. As many of you will know, in a CVA the company's proposals need to be approved by 75% by value, of the votes cast by eligible creditors. So 140 store landlords will probably control the voting outcome.

The Times journalist has canvassed some opinion and it seems because the landlords are being offered 6 months rent, many seem supportive.

Compare this with the Stylo plc outcome. There the Administrator's proposals, to the many landlords he attempted to compromise by the CVA, seemed to be "take it or leave it", apologies to the administrator if I report this incorrectly! In the Stylo case the landlords voted the CVA down.

Here is a well written extract from Sarah Butler's piece on the voting and what Sir David Jones thinks about it....

"Leading landlords and property insiders spoken to by The Times agreed that JJB's proposal was “realistic,” “fair” and “open” and they were encouraged that the management team had a clear plan to take the business forward. They said that JJB's CVA was likely to be successful because, unlike the failed CVA put forward by Stylo, the footwear retailer, in February, it was focused on renegotiating leases on empty stores, not those it wished to trade from.

However, some landlords oppose all CVAs in principle, because they put the bulk of the pain of a failing retailer on to creditors. And even if the CVA does gain approval from the majority of creditors, those who felt aggrieved could launch a court challenge within 28 days. It was just such action that scuppered a CVA by Powerhouse, the electrical retailer, several years ago.

Shareholders will also have to vote on the deal, with a 50 per cent yes vote required to pass the CVA.

Sir David says that he is not concerned because the way the CVA has been structured means that the creditor vote takes precedence over shareholders' views, but again that is open to legal challenge".

I don't agree with the comparison to Powerhouse however, the section 6 Insolvency Act application after the CVA for Powerhouse was initially approved, was on the basis of unfair prejudice against the landlords who had obtained parental guarantees from Powerhouse's parent company - Pacific Retail Group. This CVA tried to determine the parental guarantees unilaterally. The landlords appealed under s6 and won. Interestingly to me, the judgment set out the reasons why; basically the compromise "may" have worked if the parent company and or Powerhouse had offered something acceptable to the landlords in exchange for the determination of the lease and the guarantees. It did not.

So looking at JJB it would appear that lessons have been learned. In my view, CVA's are not and should not be presented as a fait accompli that will always be approved by the creditors. CVA's are however a massively powerful restructuring tool where the stakeholders (unsecured creditors, secured creditors, customers and shareholders) are all in general agreement.

By offering a deal to landlords that will ensure they have at least income for say 6 months to re-let the property, perhaps the body of creditors will agree to the JJB restructuring whereas Powerhouse and Stylo were rejected.

The moral here is this: in an ideal world the CVA should be carefully prepared, advisors should take regular soundings from the creditors and collectively a deal should be put forward that already has general consensus. KSA's style is to talk to ALL creditors whilst preparing the CVA deal structure. This canvassing helps us shape the deal. More often than not the CVA is approved well before the formal creditors meeting and few creditors attend.

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