Langton Capital – 2020-06-12 – PREMIUM – CVAs, M&B, City Pub, Revolution, Carnival, job losses & other:
CVAs, M&B, City Pub, Revolution, Carnival, job losses & other:
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CREDITOR VOLUNTARY ARRANGEMENTS: All the fashion with some. Here some of the nuts and bolts as we understand them alongside comment as to the likely implications going forward: 12 Jun 2020:
• A CVA is a binding agreement between a company and all of its creditors.
• It will not involve a change in the legal status of the company in the way that a pre-pack (still popular) does.
The well-trod path:
• We have mentioned a path or even a conveyor belt in the past.
• Companies know that they have issues, they appreciate there are negative implications, these build for a while and, at some point, there is a Saul on the Road to Damascus moment, often when the directors realise that they could be personally liable for the company’s debts if they continue to trade whilst knowingly insolvent
• At this point, advisors are brought in.
• Sky TV has termed the advisors at Intu, KPMG, as the company’s ‘administrator in waiting’ and, though a little harsh, that’s often accurate
• The major advisors are the big four accountancy firms (especially KPMG), Alix Partners, FRP Advisory and Alvarez & Marsal. Smaller accountants BDO, Grant Thornton & RSM are also active
• The advisors assess the situation, make sure that they are going to get paid & proceed from there
• They may try to sell bits or all of the business. They may attempt debt refinancing and / or fund raising but it is likely that these wells have already run dry. They may then try to auction the business
• If none of the above is successful, they may become involved in a CVA or an administration.
• The latter could be a pre-pack (the same owners usually walk away with the slimmed down business) or a straight administration leading to a liquidation in the case of fraud or incompetence or bad luck or all three (e.g. Patisserie Holdings)
A Creditor Voluntary Arrangement
• This needs to kick off with a feasibility study. Can the company (or the division in the case of Restaurant Group) continue to exist without a CVA?
• The directors, who’s heads really are on the block, need to prove it is ‘game over’.
• Accountants should and sometimes do have the courage to say ‘no’ to directors at this point
• The fact that trading ‘needs’ to be terminally bad means that CVAs with listed companies are rare. Carpetright underwent one but, we hear, it was not bluffing and was within hours of going bust twice during the process
• A division of a listed company could undergo a CVA – but creditors would need to have no recourse to the PLC with, in the case of Restaurant Group, its other assets and funds raised via a share placing etc.
• Some deals ‘you couldn’t get away with now’ our source tells us. Creditors have got their act together (although in the current environment, they will have plenty of other fires to fight)
• Certain groups of creditors, mini-bond holders, banks and equity, may seek to outmanoeuvre each other
• This will take time and cost money. The only certain winners, at this stage, are the advisors
• The directors are legally responsible for producing the documents
• There will be a lot of meetings. This, we are reliably informed, will take over their world for weeks if not months on end
• The process of cajoling creditors aims at being ‘collaborative’
• The vote needs to be 75% by value and it will need a simple majority of ‘unrelated’ creditors – so that one large creditor cannot push a deal through
How to quantify a ‘creditor’
• This is straightforward for a trade creditor, the taxman etc – but it is less clear with a landlord.
• Clearly, a landlord with 15yrs to run on their lease is a larger creditor than is one with only 6mths left to go
• The creditor is ascertained by reference to their ‘economic loss’. This will be the difference between the rent due (15yrs x £120k, for example) less the estimated market rent adjusted for any void period that is expected
• If the market rent is now £80k and a 1yr void is expected, then the landlord would be due £1.80m in a perfect world and would get only £1.12m if the tenant went bust, the unit had to be re-let and it took a year to do so
• The chairman of the meeting then, we understand, has the right to discount this figure if they choose to do so. This presumably because the loss is spread over a number of years
• The chairman’s impartiality will be closely scrutinised
And in the real world:
• If the company undergoing the CVA wishes to remain in business, then it is likely to wish to shelter some or all of its suppliers, as it will need them in future
• Other creditors may fare less well but, like turkeys voting for Christmas, they (or at least a majority of them) will have to vote for the CVA
• In Restaurant Group’s case, the company said earlier this week that its ‘CVA will not seek to compromise claims of any creditors other than certain landlords, and inter-company liabilities.’
• A number of companies may find it hard to secure a CVA because, if they have very deep-pocketed owners, the landlords (and it usually is landlords) may argue that the CVA is a convenience rather than a necessity
• Re the above, see the landlords’ current issues with Travelodge owner Goldman Sachs (hardly penniless) and consider the importance of cross-guarantees (or in many cases the lack of them)
• Restaurant Group, for example, this week said its proposed ‘arrangements will have no impact on the Group’s Wagamama, Airport Concessions and Pub operations.’
• Some CVAs commence but don’t finish. We believe that one small listed restaurant company began the process some time ago but did not carry it through
Implications of a CVA for the company:
• There is a reputational cost. Covid-19 impacts the whole industry, however, so it may be that in this environment, the risk to brand value is lower than it would be for a brand that was a stand-out failure amongst successful competitors
• There will likely be problems retaining and recruiting the staff that you would like to retain and recruit – but see the point above
• Companies, certainly those that instigated CVAs in 2018, did not go deep enough. This is perhaps partly due to innate optimism (or lack of sufficient pessimism), but it may also be because multiple landlords push back on some sites that are subsequently retained rather than disposed of
• In the aftermath of a CVA, the administrators are required to look for any potential fraud or insolvent trading
Implications for the industry and for landlords:
• In the pre-Covid world, some companies are insisting – or trying to insist – on CVA clauses in their leases such that they will see rent reductions if rivals secure CVA reductions
• This may be asking Peter to pay you for what Paul has done, but it’s worth asking
• If rival companies do not secure similar rent reductions, and they will nearly always fail to do so, they will be disadvantaged. Hence, there are frequent allegations that CVAs reward failure
• Supporters may claim that there is sometimes ‘a good business trying to get out.’ But this may be seen as a selective interpretation of capitalism. My successes are mine but my failures I need help with
FOR MONDAY (SUGGESTIONS & COMMENT WELCOME):
• We had intended to carry our CVA comments on to discuss the conveyor belt (who’s on it and where) and comment on Restaurant Group and its CVA. But we ran out of time.
• Perhaps something on who has raised how much money from shareholders and when. Companies that raised money mid-March, and quite a few did, may have diluted their shareholders more than companies will do if they are raising money now
PUB & RESTAURANT NEWS:
• The BBPA says that beer sales in Q1 were down 7.2% on sales in the same quarter last year making Q1 the lowest quarter on record. Q2 will be markedly worse because, though off-trade sales have risen, this has not compensated for the drop in sales through pubs and restaurants.
• Beer sales in pubs and bars were down by 16.4% in Q1, which will look good compared with Q2 which, to all intents and purposes, will be down 100%. The British Beer & Pub Association says the new sales data shows the immediate impact the COVID-19 lockdown had on the beer and pub industry, as pubs were ordered to close on Friday 20th March, following warnings from Prime Minister Boris Johnson as early as Monday 16th March to avoid pubs.
• It is calling once again on the government to make clear, by this weekend, whether pubs will be allowed to open on 4 July. Beer needs to be brewed, pipes cleaned, pubs tidied up, grass mowed etc. CEO Emma McClarkin says ‘our sector needs at least three weeks’ notice so that our breweries can brew fresh beer and our pubs can get ready to reopen safely.’
• London Union CEO Jonathan Downey has described a draft of the government’s proposed code of practice for landlord and commercial tenant negotiations as ‘toothless’ and ‘a waste of time’. The code is voluntary, for starters. Downey says ‘it’s a waste of time. It’s incredibly disappointing and of absolutely no value to those tenants that need the support from government.’
• Mitchells & Butlers has updated on its financial position saying that its strong portfolio of freehold properties and the actions it has taken to reduce debt ‘has put us in good shape to address the challenge we now face.’
• The company says ‘the full impact of Covid-19 on our trading and financial position is uncertain, depending primarily on the extent of the closure period and the profile of recovery, but we moved swiftly to protect the business through a reduction of cash outflows including: cancelling all discretionary capital expenditure, furloughing of over 99% of the workforce, where possible reaching agreement on extended payment terms, and the elimination of all non-essential operating expenses.’
• M&B says ‘we have also been in close contact with our main creditors and are pleased to announce that we have now reached agreement on a number of new arrangements which provide a platform of both additional liquidity and improved financial flexibility for the group in order to meet the challenge presented by Covid-19.’
• M&B has secured liquidity facilities totalling £250m through to 31 December 2021. It says that £150m is existing and a further £100m is secured under the Government backed Coronavirus Large Business Interruption Loan Scheme. M&B has cash balances of £130m and has secured new financing arrangements as, in common with other operators, ‘a number of technical breaches would have occurred under the group’s secured financing arrangements’ had these amendments not been secured.
• M&B says ‘in securing these valuable amendments the group has agreed not to pay an external dividend, undertake any share buy-backs or repurchase bond debt until the end of the financial year to September 2021, at the earliest.’ The company concludes ‘the financial arrangements we are announcing today put us in good shape to address the challenge ahead based on what we believe to be a conservative downside scenario in which the reopening of any of our sites is delayed until October and sales then build back to reach full previous year trade levels over the period to July 2021. Our current expectation is for the commencement of reopening of sites from early July this year.’
• City Pub Group has reported full year numbers to 29 December saying that it grew its business significantly during that year. Adjusted PBT was £1.2m (against £2.0m the year before) on revenue up 31% at £60.0m. The group says ‘2020 began well, but growth plans immediately curtailed by COVID-19 and closure of estate in March.’
• City Pub Group says it has taken decisive action to secure funds from its lenders and from its shareholders. Chairman Clive Watson says ‘we are excited about the prospect of reopening’ and adds ‘we will reopen with a reset, more efficient, streamlined business, reduced capital expenditure and our focus on the existing estate. We have a strong balance sheet not only to endure and prosper again, but also to take advantage of opportunities that arise.’
• City says ‘the Board does not recommend a dividend for this year and is unlikely to resume dividend payments until trading is back to optimum levels.’ Re the outlook, it says ‘COVID-19 has caused significant disruption to our growth plans and may change the dynamics of the sector going forward. The length of time we have had to be closed has caused challenge not only financially, but also for our people.’
• The group adds ‘given the continued uncertainty around timing of a full re-opening and customer behaviour, the Group is not in a position to provide financial guidance at this stage.’ It says, however, that ‘we will reopen with a more efficient, streamlined operation, reduced capital expenditure and our focus being on increasing utilisation of the current estate. The Group benefits from having a strong, asset backed balance sheet, low fixed costs as a percentage of historic sales and liquidity that will allow us to endure.’
• Revolution Bars Group has announced that it has received an irrevocable undertaking from Adrian Williams to vote in favour of the Resolutions to be proposed at the General Meeting over 2,930,584 Ordinary Shares, representing approximately 5.86 per cent. of the Existing Ordinary Shares. It says ‘the Company has therefore now received support to vote in favour of the Resolutions from independent Shareholders holding authority to exercise voting rights over a total of 8,960,281 Ordinary Shares in aggregate, representing approximately 17.91 per cent. of the Existing Ordinary Shares.’
• Sky reports that the British arm of Le Pain Quotidien has been sold to its existing owners in a pre-pack administration. Some 10 of the UK’s 26 sites will close with the loss of 200 jobs.
• Greene King has said it will sent out 1,000 PPE kits worth £250 each to its tenants.
• Punch is to offer its tied tenants up to ¾ off their rent for July with lesser reductions each month running into the autumn.
• Diageo in the US has to remove all non-recyclable plastic bottles.
• Jack Daniels’ distiller Brown Forman has reported numbers for the year to end-April saying that sales rose by 1% to $3.4bn. Sales were down by 4% in the group’s Q4. Operating income was down 5% at $1.1bn. CFO Jane Morreau says ‘Covid-19 began to affect our performance in the middle of March and continued throughout April as both on-premise, representing approximately 20% of our business globally, and travel retail channels essentially came to a halt.’
• Brown Forman says ‘we experienced strong growth in the off-premise (based on syndicated takeaway data) and e-premise channels across most of our developed markets as country lockdowns and government restrictions took hold reflecting both an increase in at-home consumption and some pantry loading.’
• Foodservice Equipment Journal has reported that Synergy Grill Technology has launched a special ‘partnership initiative’ to attract staff who may be losing their jobs in the current environment. It offers individuals the chance to start earning in a self-employed capacity by introducing operators to Synergy’s flagship cooking appliances.
• KPMG, advisors and potential administrators to Intu, are reported by Sky to have asked bondholder creditors for £12m in interim funding in order to keep the business going through a potential insolvency process. That’s the sort of request that creditors may well least like to hear.
• YUM Brands, which owns the KFC, Taco Bell and Pizza Hut brands, has said that is has seen a slight improvement in trends over recent weeks. The company, unusually updating for the intra-quarter period to end-May, says that the COVID-19 pandemic is still a major hurdle for the company.
• YUM says in May, KFC generated mid-teens same-store sales growth, albeit from a lower base. The company says Pizza Hut also delivered low-teens same-store sales growth in May. Taco Bell registered slight growth in May same-store sales against nearly 30% decline in first-quarter end.
• International sales remain tougher. YUM says in May, KFC and Pizza Hut reported respective decline in same-store sales of 25% and 10%. However, the figures improved slightly from April’s 40% and 30% decline, respectively. In North America, the group has 92% of its restaurants currently open. Some 97% are open in the Asia Pacific region and 78% in Africa, Europe, India, Latin America, Middle East, and Russia.
• KAM Media has undertaken a research study, the Return of the Pub, which is designed to ‘understand the future behaviours and attitudes of UK pub customers when pubs re-open.’
• It says ‘younger people will play a significant role in pub re-opening.’ Some 1 in 3 of those aged between 18 and 34-years expect to visit pubs more often after lockdown than they did before. It adds ‘Generation Z and younger Millennials in particular are keen for pubs to re-open.’
• KAM says ‘it’s no surprise that older customers are generally much more cautious – overall the main reason given for reducing their pub visits was “I’m worried for my health”. And for many younger customers, financial concerns will impact whether they choose to spend money on eating and drinking out.’
• Langton has commented that younger people, though they may have the desire to go out, have been disproportionately badly hit financially by the Covid crisis. They may also find that their ‘intentionally-crowded’ units are amongst the last to reopen.
• KAM says ‘overall pubs will obviously see a decline in footfall.’ This not least because they won’t be permitted to allow the same numbers of people into their premises. They will be ‘impacted very differently depending on their customer base, location and whether they are food or drink-focussed. Unfortunately, the types of pubs which may suffer the most initially are food-led and city centre locations – 48% of respondents say they intend to visit city centre pubs less often.’
• The BBC reports ONS data showing that the young have been hardest hit by the coronavirus crisis. Young people and renters spend a larger proportion of their money on essentials. A reduction at the margin, therefore, can wipe out their free spending money.
• Job losses and closures. Not pleasant to make this a feature but a host of announcements yesterday and overnight. They will impact demand for leisure products and not in a good way. Redundancies change the behaviour of the people losing their jobs (for obvious reasons) but also impact the c90% of people who, even in a bad recession, are likely to stay employed.
• Zara is to close 1,200 fashion shops worldwide. Lufthansa is cutting 22,000 jobs, again worldwide. Centrica is cutting 5,000, Johnson Matthey is axing 2,500 and Bombardier has said 600 jobs in Northern Ireland are at risk. Restaurant Group’s Frankie & Benny proposals would put 3,000 out of work and Heathrow has intimated that 2,500 jobs may be cut. Nissan is cutting 250 and The Times has said it will be ‘saying goodbye to some valued and talented colleagues’.
• BA, EasyJet and Ryanair are cutting jobs. Accountancy firm Grant Thornton is reported to be considering laying off staff. Airbus has warned that more jobs are at risk in the UK than in France and Germany.
• McDonald Hotels Group alongside English Lakes Hotels and Apex Hotels have all begun to consult with staff, the formal step that needs to be taken when large companies wish to sack staff. There are 1,800 jobs at risk at McDonald.
HOLIDAYS & LEISURE TRAVEL:
• TUI UK and Ireland has cancelled all beach holidays up to and including 10 July.
• Heathrow has reported traveller numbers down 97% in May. It has said it will lay off staff.
• EasyHotel has updated on its reopening programme saying that it will be reopening its UK, France and Spain hotels as lockdown restrictions ease. The company says it ‘is already safely operating a number of its hotels in line with public health guidance throughout Continental Europe and Middle East.’
• EasyHotel says it is enhancing its cleaning routines saying ‘when guests arrive at an easyHotel, they can rest assured that any potential touchpoints, such as door handles and lift buttons, are being regularly disinfected – and easyHotel encourages every person walking into a hotel to immediately use the hand sanitiser provided at the entrance.’ CEO Francois Bachetta says ‘it is fantastic that we are set to reopen and begin welcoming back guests in the coming weeks.’ He adds ‘I am confident that our guests will see we have taken all possible precautions and that they will sleep soundly in our great value hotels.’
• Carnival has announced that its Holland America Line has extended the pause on its operations into the autumn for its Vancouver departures and has made changes to its early 2021 Hawaii itineraries.
• Lufthansa is to cut 22,000 jobs worldwide.
• The government has issue its guidance to travel companies. It says that passengers should be advised to wear a face mask and check in all of their luggage.
• McDonald Hotels has warned 1,800 of its staff that their jobs are at risk. Group deputy chairman Gordon Fraser says ‘potentially, we are looking at around 1,800 roles at risk, in all areas and at all levels of the business.’ He says ‘the government’s furlough scheme has helped to a degree but our essential operating costs, insurance and some wages are still having to be paid.’ He says ‘there is no realistic prospect of us returning to anything approaching normality for the foreseeable future and, whilst it’s enormously regrettable, we simply must take these steps to ensure that we have a meaningful business when this situation ends, enabling us to bring back as many of our employees as possible.’
• Trailfinders has told customers that it has been dealing with repatriations and refunds over recent weeks. It says ‘we would like to share our refund story with our subscribers’ and adds ‘overnight we were faced with a responsibility for repatriating 20,000 clients while simultaneously refunding 30,000 people due to travel in March and April, with more added on a rolling basis.’
• This was clearly no small task. The company says ‘we have processed refunds for 100,000 people totalling £115 million. £30 million coming from our own reserves to bridge the gap for our clients, as most airlines and some other suppliers have been slow to refund. At the extreme, some airlines have said refunds will take a year and others are in administration. TF have covered this shortfall from our own pocket.’
• Apart from everything else, the shoe leather and elbow grease expended in dealing with this crisis has been monumental.
• STR has reported that the US hotel industry saw a further small uptick in the week to 6 June. It says occupancy was down 45%, room rates were 36% off and REVPAR was down by some 65%. STR does not expect a V-shaped recovery.
• STR says ‘the lower end of the market continued to lead, with economy properties finally selling more than half of their rooms again, although all hotel classes were comfortably above 20%.’
• Sony has begun to give sneak peaks at its PS5 console.
• Snap Inc has introduced a number of new features for its photo messaging app such as new original shows and the facility for outside developers to create products
FINANCE & ECONOMICS:
• The Institute of Directors says that its confidence tracker is plumbing new depths. It says that companies have cut back sharply on investment.
• Zoopla has said that UK house sales are near to pre-lockdown levels. That seems somehow hard to comprehend. Maybe it was the pipeline of transactions already in progress emptying.
• China auto sales were up by 14.5% in May, the second consecutive month of growth.
• Reuters has reported that a number of commercially available Covid-19 antibody tests ‘don’t work properly’.
• Sterling weaker at $1.2572 and €1.113. Oil lower at $37.87. UK 10yr gilt yield 8bps lower at 0.19%. World markets lower yesterday on rising coronavirus case numbers. London set to open a short 40pts lower.
• The UK government is reported set to introduce much less rigorous EU border checks on imports than it initially had planned
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
• Games Workshop: The share price of the high-flying Games Workshop has taken a tumble in the last 2 days, along with the rest of the market, but before that it had seen a spirited recovery and it is still capitalised at as much as £2.3bn…And investors will be very reassured with today’s pre-close update for y/e May, as it flags that “306 of our 532 stores are now open in 20 countries” and that “our recovery since re-opening has been better than expected”, such that “we now estimate our sales to be c£270m and profit before tax for the year ended 31 May 2020 to be no less than £85m”. The company has not spelt it out, but that is an improvement on the £256m sales and £81m PBT in the previous year, helped by strong licensing income, and, having sailed through the pandemic over the last 3 months with so little damage, Games Workshop intends to repay recent Government subsidies where
• BDO High Street Sales Tracker: The BDO High Street Sales Tracker today for medium-sized Non-Food chains flags that in w/e Sunday June 7th, Total BDO LFL sales (including a handful of Homewares and Lifestyle retailers, as well as Fashion retailers) were down by c22% (down c80% in Store sales, but up by c130% in Online sales).
• Trade Press: Neither Retail Week magazine or Drapers magazine has been published this week, alas, but both websites have plenty of commentary on this week’s news from Monsoon Accessorize, Debenhams and QUIZ etc. And Retail Week has published its annual Retail 100 list of the industry’s most influential leaders, topped again by Dave Lewis of Tesco. Pets at Home boss Peter Pritchard has jumped 36 places on 2019 to 47th position (making him the highest riser), whilst Mike Ashley and Philip Green have dropped down in the rankings considerably (both by 15 places), “reflecting the mis-steps they have made in leading their teams and managing their public profiles”.
• News Flow Next Week: The highlight of next week is the re-opening of “non-essential” shops on Monday (including the delayed opening of the new Primark in the Trafford Centre in Manchester), but there is plenty of company news scheduled, plus other updates due (eg Joules). The Motorpoint finals have been delayed to July 14th, but Wednesday brings the Boohoo Q1 and the Kingfisher finals following on Wednesday. On Thursday we get the finals from New River (the community shopping centre and pub landlord) and the Ted Baker EGM (to approve the recent rescue deal), with the ONS Retail Sales figures for May and the Boohoo AGM following on Friday.