What is a restructuring plan?
Finella: The UK restructuring plan was first introduced by the UK Corporate Insolvency and Governance Act 2020. It is a court approved process where multiple classes of creditors’ claims (eg, shareholders, secured creditors, preferential creditors and unsecured creditors) can be categorised. They get notified of how they’ll be treated in the process and they get a chance to vote for or against the plan (with each class of creditors voting independently).
So far, the restructuring plans we’ve seen have been done with companies with average revenue of in excess of £700m and have a complex structure with several creditor classes impacted.
What are the pros and cons of restructuring plans for retailers?
Karen: When you’re looking at pros and cons you’re really comparing them against other more established restructuring tools utilised by retailers, particularly CVAs. The most appropriate route will likely depend upon the nature of the business, make-up of the creditors and dynamics around the risk of challenge and timings/costs constraints. That said, there have been examples of wider restructurings that have involved both a RP and a CVA.
Finella: The main difference of a UK restructuring plan compared to a CVA, is that creditors get to have their day in court if they so wish. The court will decide whether it is better for the company as a whole to cram down the creditors – where the court could force through the restructuring plan on the other dissenting class(es) of creditors.
Is this a more appealing route forward for retailers? While it’s more costly than a CVA, it gives more certainty because the court’s decision is final (barring an appeal). Creditors have the opportunity to be heard during the process if they so wish. By the time you get to the end of the circa 12-week period creditors know where they stand.
Karen: It’s definitely an advantage of the restructuring plan process, when you’re done, you’re done. With a CVA there’s always a risk during the 28-day challenge period that, although you might think you are done, an appeal comes in.
Finella: With a CVA you’ve got all the unsecured lenders lumped together and voting in terms of volume. But if you had two creditor classes in a retail restructuring plan, with unsecured creditors and landlords, the court can cram down the landlords if necessary if it believes it’s better for the company and the landlords will not necessarily be better off in the relevant alternative, such as liquidation. It means that landlords are no longer the biggest players; there are other voices that can be heard through this new process.
Who are the key winners and losers in the retail market right now?
Karen: A lot of people are actually very upbeat despite the pressures, with inflation and the cost of energy being big ones. Suddenly running a fleet of vans and having the lights on in your stores is more expensive. Retail margins aren’t high. There’s not a lot of slack when your operating costs start to rise, and you need to work out if you are going to pass that on to the consumer and, if so, how upfront about it are you going to be.
With a CVA there’s always a risk during the 28-day challenge period that, although you might think you are done, an appeal comes in.
But look at some of the results that have come out recently, some businesses are doing incredibly well. Some would say too well! It’s a really mixed picture.
Finella: We had a client in the home furnishings sector and they’re looking pre-emptively at a sale or potentially an insolvency. They can see down the line some pressures: they manufacture in China where we are seeing another Covid-related lockdown which is leading to uncertainty there. There’s the landlord issue which is going to hit their retail outlets at the end of the month. They’ve got increased transportation costs because of the war in Ukraine. It’s the perfect storm for significant rising costs to the business whilst consumer spending in that area is likely to decrease.
Karen: The supply chain is critical. As is managing your store estate if you’re a bricks and mortar retailer. It’s rare to find a unique issue unless it’s something like a fraud or some other outlier, most things in the sector aren’t particular to any one business and it’s how you address them. Also, how quickly.
Has or will the much-anticipated wave of Covid-19 restructuring materialise?
Karen: My view is that Covid just accelerated changes that were already happening. Online retail is doing really well for example. If you look at the statistics, there was clearly a huge spike which has now dropped back as people value shopping in physical stores because of the shopping experience they get. But the share of wallet for online is still greater than it was pre-Covid. It was always going to happen. Covid changed consumer behaviour and forced companies to look at their operating model. The Government also provided a range of support to retailers and other businesses so, after an initial swathe of restructurings, the market quietened down. On the corporate side, my sense is distressed M&A in the sector is on the up. Whether or not the ‘debt overhang’ is going to be a decisive factor is one to watch out for.
Finella: Our industry is expecting to see a significant increase in insolvencies. To some extent, we have seen some already. We think it is coming now, and the industry is getting busier. We’re going to see a raft of insolvencies as they have to pay back some of the cash they borrowed as interest rates rise and the Government protections fall away. That coupled with the war in Ukraine and the recent sanctions will all have an impact.
What makes RPC’s retail and restructuring offerings stand out?
Karen: We’re tier 1 ranked for retail with more leading individuals than any other firm. We’ve been doing this for years, even before it was trendy! We have subject matter expertise among all our practice areas, loads of our lawyers have been on secondment, and we’re got a range of fantastic – and really supportive – clients. We have brilliant business training as well as legal training. A lot of the training we give people is practical: it’s how to run an e-commerce business rather than how to draft an SPA (though that’s clearly important too!). There’s a genuine love for retail in the firm.
Finella: Part of the reason my team were brought into the firm was to support our market-leading retail practice and its clients to manage and transform risks for those operating in the retail sector. I was in the thick of it during 2008/9 and I did a lot of retail insolvency back in that time. You used to be sent out on site a lot – I remember being out on site for three months plus once during one large retail administration. The team that came with me and the team that was here already, including our partners Paul Bagon and Tim Moynihan, have got a lot of experience within the retail sector. When your company is in trouble and someone’s threatening to turn off your lights, we know exactly what to do.
Finella Fogarty is head of restructuring and insolvency and Karen Hendy is co-head of retail at RPC.
