Drapers unpacks some of the myths surrounding pre-pack administrations.
Controversial pre-pack administrations have become popular tools for struggling retailers seeking to rescue their businesses. Creditors – including landlords and suppliers – can be left out of pocket when a struggling retailer goes into administration and either its owner or a new party buys back the more profitable and desirable parts of the company almost instantaneously, thereby jettisoning loss-making or expensive stores.
Yet despite their unpopularity, many argue that saving the viable parts of the business is more favourable than a wholesale administration, liquidation and compulsory redundancies. Here, Drapers uncovers some of the more nuanced aspects of pre-packs and what can be done to avoid them.
1 A solvent deal is considered preferable
Several alternatives to tackle financial difficulties are taken into account, such as refinancing, sales of all or part of the business or resetting covenants with existing lenders, before the notion of a pre-pack is entertained. The process of deciding on the most suitable solution can take up to 12 weeks.
2 Cutting the rent bill may save the business
As an early consideration – before they even begin to look at options such as refinancing – company boards can try to negotiate reduced rents to ease their financial burden.
3 Stakeholders can help
Directors are often reluctant to engage other stakeholders because they are afraid of the outcome. However, financial advisers recommend including as many key suppliers, significant customers and shareholders as possible at an early stage, to help weigh up more solutions and maximise chances of creditor support.
4 Pre-packs can be the lesser of two evils
Pre-packs are seen as a more favourable outcome than administrations in most cases, as the latter involves complex issues regarding funding and payment of suppliers, among other factors. For fashion retailers, where the principal asset is stock, there is the added uncertainty of what they could receive from trading stock out.
5 The market prefers a fluid approach
Several distressed merger and acquisition processes have been known to fail when an adviser puts a specific sale value out to prospective trade parties, financial investors and lenders. The challenge management teams face is to approach the market with a plan that does not eliminate the possibility of either a solvent or insolvent outcome, as proposing one can cancel out the other.
6 Advisers do try to find solvent solutions
Some sceptics believe advisers might encourage pre-pack arrangements for their own benefit. However, these are in fact not as lucrative as other administration processes, mainly because pre-packs run for a shorter period of time and do not provide opportunities to quote prices.
7 The returns for unsecured creditors are low
Insolvency practitioners argue that even though return to unsecured creditors in a pre-pack would be significantly reduced compared with alternative outcomes, the buyer often negotiates some deals with existing suppliers to maintain continuity. Advisers maintain this is the best result where a company could otherwise have gone bust and lost jobs on a larger scale.
8 There are tools to make the process more transparent
The Pre Pack Pool is an independent body of experienced business people who can offer an opinion on the purchase of a business and/or its assets by connected parties to a company where a pre-pack sale is proposed. It was among several measures designed to improve transparency recommended by the 2014 Graham Review into pre-pack administrations. However, only 28% of the 188 connected-party pre-packs that took place between 1 November 2015 and 31 December 2016 were referred to the Pool, as reported by its inaugural report.