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Landlords save more than 6,000 jobs by agreeing JJB CVA

The country’s biggest commercial landlords have backed a deal saving more than 6,100 jobs at JJB Sports after the retailer met creditors today to seal a company voluntary agreement (CVA) avoiding administration.

However the British Property Federation, representing landlords, said the result should not be seen as a green light for other businesses to exploit CVA rules and dump failing properties, unless they are in genuine difficulty.

The BPF praised JJB’s and advisor KPMG’s transparent dealings with creditors, and said  the inclusion of a “clawback” mechanism in the CVA – a dividend that will see affected landlords compensated for some of their losses – should be held up as an exemplar for future deals.

A CVA is essentially a ‘reduce it or lose it’ deal whereby JJB will agree to pay its creditors a proportion of what it owes them. Landlords of JJB fall into three categories under the CVA. Some will see their properties vacated by April 2012; some will have to accept 50% of the rent due to them for two years, and may see their stores closed, and some will see their properties remain open but with rent paid monthly rather than quarterly.

According to KPMG, creditors are likely to receive between 25p and 29.2p in the pound they are owed under the CVA, but this compares with just 1p if the company falls into administration.

JJB recently said it had secured key support from shareholders, including the Bill and Melinda Gates Foundation, for a £65m fundraising, while Bank of Scotland is also prepared to extend £25m in working capital. However, the support is conditional on a successful CVA vote, which requires backing from 75% of all creditors. Landlords made up the bulk of the creditors and so controlled the vote.

The vote marks the second time that landlords have saved JJB from administration in three years, following a similar CVA in 2008.

Liz Peace, chief executive of the British Property Federation, said: “Landlords treat each CVA on its merits and JJB is a business undergoing significant changes. This is not an opportunistic dumping of stores, rather a genuine attempt at rescuing the business, and should not be seen as a green light for other retailers to restructure their portfolios via a CVA at the expense of both landlords and their competitors.

“It is extremely welcome to see a “clawback” arrangement included in this CVA and we hope that this establishes a precedent that should form part of all future CVAs. After all, it is only fair that having taken a hit and allowed JJB to avoid administration, landlords’ shareholders – many of whom are pensioners – are compensated when the company returns to health.

“The key to a successful CVA is engaging early, openly and transparently with creditors. Of course, landlords never want to see vacant properties and will try to be flexible and to help their tenants. However it should be remembered that landlords are operating under their own financial constraints and are acting in the interests of their own shareholders, which is entirely the right thing to do”.   

Malcolm Naish, Director of Real Estate at Scottish Widows Investment Partnership (SWIP), said: "SWIP Real Estate has JJB Sports as a tenant in 11 locations in the UK and is represented in five of our Funds.

“We feel that the company has been open and honest with us about its situation. The majority of our locations will continue to trade and we remain confident that any stores that become void will present us with opportunities to add value for our clients in the near future through re-lettings or extensions for adjacent retailers.

“The potential for an additional dividend in the slimmed down company, if successful, is to be welcomed.

“With our partnership approach, we have enjoyed a constructive landlord and tenant relationship with JJB Sports for several years and hope that this will continue in the future."

Lawrence Hutchings, Hammerson Managing Director UK Retail said: “This is a positive outcome for consumers, stakeholders and investors. We are conscious however, that the hard work in turning JJB around starts today. We look forward to working with JJB, as with all our retailers, to drive sales and footfall at our shopping centres and retail parks to our mutual benefit.”

ENDS

Contact the BPF on 020 7828 0111

Patrick Clift, Media and Public Affairs Manager, on 07834 439 505 or at pclift@bpf.org.uk

Paul Sweeney, Media Assistant, on 07841 732 194 or at psweeney@bpf.org.uk

THE TERMS OF THE JJB CVA

The JJB CVA is a complicated restructuring involving multiple capital raises; interlocking CVA proposals and a business turnaround package all of which depend on the CVA being passed.

JJB currently has c 250 retail stores. The CVA proposes to:

·         Enable the closure of 43 stores on or before 24th April 2012 (1st compromised leases);

·         Enable the closure of a further 46 stores on or before 24th April 2013 (the 2nd compromised leases) pending a review of their trading performance;

·         To continue to trade from c.150 unaffected stores; the payment of rent being paid monthly rather than quarterly;

·         On the 1st/2nd compromised leases 50% rent is proposed to be paid up to the closure point including a 5% figure of the contractual rent for dilapidations;

·         To enable the landlord of the 1st/2nd compromised leases to require the Company to vacate at 45 days notice;

·         JJB to be liable for the empty rates on the compromised leases until those stores are surrendered, forfeited or assigned or the leases are terminated due to a break clause.

·         Provide a fund for the landlords of the compromised units that is linked to the performance of the company and payable two years from the date of the creditors meeting (23rd April 2013).

See the full CVA proposal at:

http://www.jjbcorporate.co.uk/pdf/CVA%20proposal%20(JJB%20and%20Blane)%20-%20Final%2003-03-11.pdf

Should the CVA be passed the management team of JJB Sports will still be in place to turnaround the business. KPMG will be involved to monitor the CVAs progress and to terminate it if the terms are breached.

THE CLAWBACK

The clawback fund of between £2.5m and £7.5m is only available to landlords owning compromised leases (c. 100 properties). It will be payable on 24th April 2013 or before the companies shared cease to be traded on any recognised stock exchange and is proposed to be based on the company’s market capitalisation.

TWO CVA’s ALONGSIDE EACHOTHER

There are two interlocking CVA’s which must both be passed for the proposal to stand: the JJB CVA and the Blane Leisure CVA. Blane Leisure is a subsidiary company of JJB which contains a number of the leases for the Company (especially in Scotland). Despite some media speculation that the votes of Blane Leisure will prove decisive, landlords effectively swing the CVA vote.

WIDER JJB CAPITAL RAISING

Alongside the CVA JJB are undertaking two capital fundraisings in order to capitalise the business. The first was for £31.5m which was successful raised on 22nd February which is short term working capital for the business. The second is a sum of £65m which is dependent on a successful CVA (the details of which will be announced on 5th April 2011). Should the CVA fail, this money will not be raised. There are 5 principle shareholders of JJB.

WHAT ARE THE IMPLICATIONS FOR LANDLORDS OF THE CVA PROPOSAL?

The upside for landlords of a successfully passed CVA are a continued business, continued occupancy (in the main), fresh capital injections into the business to assist with the turnaround. The downside for landlords of a passed CVA are the precedent that another approved CVA sets which increases the risk of future restructurings of other struggling businesses.

Should the CVA be voted down, the company will enter into administration or liquidation.

COMPANY VOLUNTARY AGREEMENT (CVA)

A CVA is a legally binding agreement between a company and all or certain of its preferential and unsecured creditors whereby the company makes a formal offer towards repayment of its liabilities. A totally flexible arrangement, the CVA does not have to provide for full repayment of all liabilities only more than could otherwise be expected were the company to proceed into liquidation or a pre-pack.

Proposals for a CVA are usually made by directors of a company, unless it is subject to an administration order or a liquidator has been appointed, in which case the duly appointed administrator or liquidator may seek the agreement of a CVA.

In practice, CVA proposals are drafted by the directors with the assistance of a licensed insolvency practitioner known as the nominee.

The proposals are then circulated to court, creditors (including prospective and contingent creditors) and the shareholders, calling meetings of creditors and shareholders on a minimum clear 14 day notice period.

More often than not, proposals, once approved, provide for a stay of execution from creditors to enable the company to continue trading, a percentage of profits generated post CVA being paid to the supervisor of the CVA for a period designated within the proposals for the benefit of the creditors included in the CVA.

A CVA is a totally flexible procedure and can simply be utilised to avoid the higher costs of liquidation. The CVA is subject to agreement of 75% in value of those creditors entitled to vote; they do so either in person or by proxy at the meeting.

Directors remain in control of the company after the approval of the CVA.

Key components for a successful CVA

·         Honesty and transparency as to the affairs of the company within the proposals.

·         Offering a higher return to creditors than could otherwise be expected were the company to proceed into insolvent liquidation.

·         If the CVA is based on continued trading, creation of a viable business that can return to profitability and sufficient working capital.

·         Being realistic, unless there are extraordinary grounds for the failure of the business such as experiencing bad debts, creditors will rightly be sceptical of proposals including projections which show significant profits being generated without adequate explanation.

·         Determination and hard work of all parties.

Advantages of CVA

The company

A company may now make an application to court for a moratorium preventing creditors from taking enforcement action against it whilst proposals for a CVA are put to creditors (see newspage). The benefit of the moratorium will be to provide additional breathing space between filing in court of the proposals and the date of the creditors’ meeting, a period which, prior to the introduction of the moratorium often resulted in creditors instigating enforcement action to secure their position outside a CVA.

The scope of the moratorium is similar to an administration moratorium (see administration section).

Provides breathing space once the CVA is in place, to reorganise and restructure the company without the threat of creditor action.

Costs are significantly less than those likely to be incurred in an administration.

No requirement to advertise either on letterhead or in newspapers that the company is subject to a CVA. However, if wishing to benefit from the moratorium when it becomes law, the company is required to disclose the fact that it is subject to the moratorium on all documents circulated by it during the normal course of trading.

Directors

The directors remain in control of the day-to-day affairs of the business.

The supervisor is not required to undertake an investigation into the affairs of the company and, unlike a liquidation, is not required to submit a report to the Disqualification Unit of the Department of Trade and Industry.

A supervisor cannot bring fraudulent or wrongful trading actions against directors, nor can a supervisor bring an action pursuant to S238, 239 and 212, transactions at an undervalue, preferences or misfeasance.

Provides directors with continued income.

Creditors

Provides an opportunity to recover more of the money lost than could otherwise be expected in a liquidation.

If continued trading of the company is envisaged, enables the creditor at its discretion to continue a trading relationship with the company, benefiting from future sales.

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