Graham Martin, KPMG Services Pte. Ltd. 11 October 2016

Transcription

1 Company Voluntary Arrangements in the UK Graham Martin, KPMG Services Pte. Ltd. 11 October 2016

2 Content Commentary Introduction Effectiveness of CVAs Case studies Fitness First Travelodge 2

3 Commentary - Introduction - Effectiveness of CVAs

4 Introduction Legislative background UK government commissions a review of insolvency law and practice Cork report published recommending the enactment of more debtorfriendly procedures in order to promote business rescue New procedure implemented to allow a company, whether or not insolvent or facing insolvency, to make an arrangement with its creditors and members for satisfying its debts Introduction of moratorium for small companies only 4

5 Introduction Key features of UK CVA procedure Proposal made by the directors, JM or Liquidator Nominee reviews proposal and recommends creditors and shareholders consider it Meetings of creditors and shareholders convened on 14 days notice Creditors can accept, modify or reject the proposal Proposal requires approval by 75% by value of voting creditors and. Company management remains Also requires the approval of a majority of shareholders but the decision of the creditors prevails Can be challenged by a dissenting creditor or shareholder (28 day window) Grounds for challenge are material irregularity (procedural error) or unfair prejudice (see below) 5

6 Introduction Unfair prejudice and material irregularity Fundamental principle emerging from the case law suggests that any creditor for whom an alternative (administration or liquidation) would have provided a better outcome is likely to be able to successfully claim unfair prejudice However, the Powerhouse judgment suggested that the different treatment of creditors in the same class was not in itself unfairly prejudicial. This is a key point Fundamental principle of material irregularity case law is the question of whether, if corrected, the alleged irregularity would probably have led to a different voting outcome 6

7 Introduction UK CVA timeline Proposal launch Creditors meeting CVA stands if unchallenged Planning 14 days 28-day challenge period Month 1 Month 2 Month 3 Members meeting 7

8 Effectiveness of CVAs Early days Following implementation of the legislation, CVAs were widely deployed in the UK by distressed companies to compromise creditor arrears in return for a share in a fund established by the CVA into which the company pledged to make payments from future profits By and large, such CVAs were unsuccessful for the following reasons The companies in question remained fundamentally loss-making and were therefore unable to meet the scheduled contributions into the CVA fund Insufficient thought was given to the impact on future supplies (withdrawal or reduction of credit terms, removal of credit insurance) Insufficient consideration was given to the potential impact on customer confidence Initially no moratorium was available other than an Administration Order which was highly disruptive to trading and therefore value destructive Moratorium introduced in 2000 for small companies only and is highly restrictive / onerous in practice therefore its use is uncommon 8

9 Effectiveness of CVAs The KPMG approach in the UK In our experience, CVAs work best when focused on the compromise of specific liabilities e.g. property lease and other onerous contractual liabilities, pension scheme liabilities as opposed to blanket compromises including ordinary suppliers which are more likely to cause significant future business disruption There should be an underlying profitable business or a credible operational restructuring plan Sufficient funding should be in place to ensure that any additional working capital requirements arising in the period of uncertainty between the proposal and approval of a CVA (and potentially thereafter) are covered To minimise business disruption, consultation with stakeholders not directly affected by a CVA is as critical as consultation with those who are A detailed feasibility study should be undertaken as a first step. 9

10 Effectiveness of CVAs Key CVA ingredients Stakeholder support Viable core business Realistic proposal 5 DISTRESS Strong management Funding 10

11 KPMG CVA case studies - Fitness First - Travelodge

12 CVA credentials Case Study I - Fitness First 12

13 CVA credentials Fitness First Facts and figures Founded in 1993 under the slogan affordable fitness Largest global player with 1.2 million customers worldwide Owned by US investment fund since 2005 Senior debt of 600 million Approximately 150 UK clubs Majority of UK leases guaranteed by UK parent of global business Hit by discretionary spend downturn and advent of budget operators 13

14 CVA credentials Fitness First Restructuring headlines CVA Platform allowing orderly exit from 67 gyms to be transferred to other operators over a six month period at 55% of rent Exit on similar terms from 14 sites Reduction of rent by 35% on a handful of sites for three years Conversion of all lease property payments to monthly terms Compromise of parent company guarantees for compromised leases Schemes of arrangement Transfer of shares by exiting equity holder for negligible consideration Write off of senior debt in return for 75% equity Injection of 100 million facility on favourable terms for remaining 25% 14

15 CVA credentials Fitness First More facts and figures Approval by 97.6% of creditors in total Landlord vote alone was 75% including 60% of compromised landlords 15

16 CVA credentials Case study Travelodge 16

17 CVA credentials Travelodge Facts and figures Opened 1 st hotel in1985 evolving into the UK s second largest budget hotel operator. Currently operates 505 hotels in the UK Sold by Permira to Dubai Investment Capital in 2006 in a highly leveraged deal Secured debt of 633 million including senior & mezzanine Unsecured debt of 476 million in loan notes Suffering from impact of global economic downturn Estate also suffering from a lack of recent investment 17

18 CVA credentials Travelodge Restructuring headlines CVA Platform allowing orderly exit from 49 hotels to be transferred to other operators over a six month period while paying 55% of rent Reduction of rent by 25% on 109 hotels for three years Restriction of forfeiture rights for landlords of compromised sites Schemes of arrangement Write off of 233 million of mezzanine and senior debt Loan notes of 476 million effectively extinguished Injection of 75 million new money in return for 100% equity 18

19 Travelodge More facts and figures Approval by 97.4% of creditors in total Landlord vote alone was 95% High level of interest in the transfer hotels No impact on forward bookings post CVA launch Annual rent savings of 7.1 million on top of 5.9 million improvement in total hotel contributions through closure of underperforming sites 19

20 Thank you

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