Pre-pack dominance ignores better options

You are a retail estate landlord. Offered the choice between a cushion of
income from problematic stores, no outgoings for six months and a solvent
employer with prospects; or getting the keys back next week, with no rental and
ongoing liabilities, you would choose the former; right? Wrong.

The parent of ill-fated shoe sellers Barratts and Priceless, Stylo plc,
attempted to broker a company voluntary arrangement (CVA) through subsidiary
companies, but it has been torpedoed by its landlords. The solvent restructuring
attempted by Institute for Turnaround fellow Ian Gray, Stylo CEO Michael Ziff
and their advisers was being closely studied by other multiple retailers with
similar trading issues.

Its failure could well trigger another spate of pre-packaged administrations,
with predictably unpalatable consequences. In the soap opera of the current
recession, the spotlight has shifted from one systemic problem to the next ­
derivatives merchants, bankers, credit insurers and now landlords are centre

Under the Stylo proposal, all unsecured creditors would have been paid; new
capital introduced; pension liabilities and employees’ rights honoured; all
stores retained for six months; and turnover rental paid while landlords and
tenants agreed an orderly reorganisation, giving them breathing space to find
other tenants.

Premium stores would have seen full rentals reinstated in around 3 months.

Ultimately, and perplexingly, the plan was voted down ­ rather like turkeys
voting for Christmas-in-July. It seems that landlords focused on the fact that
some stores would need to be closed (after the period of grace and in
consultation with each landlord to agree the best option), rather than the
reality that by rejecting the plan, revenue will terminate almost immediately.

Landlords will lose rental of several million pounds on a sizeable portion of
the estate plus vacant property rates and no contribution to service charge;
unsecured creditors are exposed to the tune of £15-20m, HMRC will not receive a
£5m settlement and there will be statutory redundancy costs of around £1m, while
the Pension Protection Fund incurs a liability estimated at £5-7m.

The failure of such an ambitious CVA is a shame because business recovery
seems to have become dominated by the pre-pack administration, especially in
retail. Some estimates calculate that pre-packs are now half of all
administrations. But Increasingly, pre-packs have been used to restructure

In some cases, the serial pre-pack has manifested itself. Instead of
re-financing themselves out of trouble, a minority of businesses have been

Pre-pack cheerleaders claim that the business is better maintained because a
deal is done outside the insolvency and this, they say, preserves value for‘all

How could turnaround executives disagree? The costs of a time-consuming
insolvency, the ensuing loss of confidence, trading and legal obstacles and the
often brutal effect on employees can destroy lives as well as financial value
and reputation.

A pre-pack, or the threat of one, can be a mechanism for delivering a
financial restructuring, especially where there is a complex debt restructuring
being impeded by a minor creditor who is abusing that position to wreck an
equitable deal.

Regrettably, even where pre-packs operate in accordance with a protocol and
are transparently managed, it by no means guarantees that the business will

Leaving an under-performing management in an under-performing business
without implementing a turnaround plan is a recipe for disaster ­ it’s just a
question of when? Equally worrying is the trend towards putting companies with
property creditors into a pre-pack from which the secured creditors and
management emerge intact but have shed their rental and other liabilities. The
abandoned estate may then become the problem of a head lessee with the
reversionary interest.

The glut of retail space has been accelerated by the use of pre-packs. This
has on the whole been problematic for landlords rather than trade creditors, as
the surviving businesses still need to work with their suppliers.

With competent management, it is a plus to have directors stay in control
under a CVA arrangement. The administrator in Stylo proposed the CVA (of the
subsidiaries, not the plc) which did introduce some creative tension, outweighed
by the breathing space and legal certainty created relative to a wholly
consensual restructuring.

Ian Gray recently achieved a consensual CVA involving just a handful of
landlords and other stakeholders. Stylo had 270 landlords and around 1,000

The proposal was ambitious but had already been backed by Prudential, Lloyds
and Barclays. The Stylo approach is an innovative and elegant technique whose
time should come. Is it too early in the recession for landlords to see the
writing on the wall?

RICS and PwC research has already flagged up the prospect of 50% vacant units
on the high street.

Landlords need to take a reality check and support restructuring proposals
that keep viable companies solvent, people in jobs and UK plc in with a chance
of turnaround.

If that isn’t sufficiently persuasive, then management may just decide to
pre-pack its baggage and walk away.

Christine Elliott is the CEO of the Institute for

Close but no cigar

The rejection of the innovative Stylo CVA by creditors is a sad but
understandable outcome.

The rescue plan was a move towards a more consensual approach to rescuing
insolvent businesses, especially in sectors like retail and hotels, where an
adjustment to property lease obligations is essential to reflect the new
commercial realities and to re-calibrate business models. It was also
ground-breaking in suggesting a move away from fixed rentals for retailers t
owards a basis linked to turnover, thereby turning the albatross of a fixed
commitment into a more suitable variable cost.

The proposed model added much-needed transparency to the restructuring
process, enabling creditors to play a meaningful role in the vital negotiations
to save these businesses. One must hope that the failure of the Stylo CVA does
not mark the end of this promising approach. The vogue in recent years to take
the pre-pack Administration route has far too often left creditors
disenfranchised, especially in the many situations where there will be nothing
left in the pot for unsecured creditors.

The Stylo landlords appear to have rejected the scheme on the grounds of not
setting a dangerous precedent, which would also weaken the integrity of their
own funding arrangements. Despite this, an acceptable way must be found for
landlords to join other creditors in making a contribution to the pain being
shared by other retail stakeholders, or else our high streets and shopping
centres will soon have many more eyesore gaps.

Nick Hood is senior London partner at Begbies Traynor

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