Toys R Us – Restructuring being conducted by way of Company Voluntary Arrangement

Toys R Us – Restructuring being conducted by way of Company Voluntary Arrangement

December 14, 2017

You SPIN me right round, baby, right round like a record, baby – Dead or Alive 1985

There you are – my early Christmas present to you, an earworm that hopefully drowns out Greg Lake , Slade, and Roy Wood and the usual suspects. I like a good Christmas tune, don’t get me wrong, but maybe just for Christmas Eve through to Boxing day – not 24/7 for the whole bloomin’ month!

The Spin Cycle

But talking about spin, hat’s off to the team over at Toys R Us (“TRU”); they have played a blinder. In early December it was announced that TRU would be shutting down 25 of its 106 UK stores putting 600 jobs at risk. The press coverage focused on it’s a “business as usual” and “no impact on customers” viewpoint. This was apparently a restructuring reflecting the fact that the expensive big sheds located out of town belonged to a business model that was soooo  last century. Shut a few stores then and apart from the human capital everything will be dandy. Bish bosh, job done.

But buried in the minutia of the press releases was a little aside about the restructuring being conducted by way of Company Voluntary Arrangement (“CVA”) and there is the little matter of this requiring creditors approval at a creditors meeting due to be held on 21 December. That means the CVA proposals will require approval form 75% of the creditors attending in person or by proxy. Hmmm…..

Same record different sleeve

We have been here before. Its retail, the internet happened so fast (isn’t that getting a bit old as an excuse now?) the business model needs changing, and the business can’t afford to do these changes outside of a process.

Of course for retail chain it’s all about reducing costs particularly the operational costs of the under- performing stores. So retail CVA’s are usually all about “cramming down” on the landlords, in what is usually a fairly divisive manner. Retails chain broadly want to exit loss making stores and keep the profitable ones, but complexities of leases, the timings of closures and the negotiating stances of landlords often means that various categories of landlords are identified and each category is treated differently in the CVA.

These types of CVA usually rely on the other unsecured creditors (trade suppliers, pension funds, etc) to vote in favour of the CVA and get it approved. Arithmetically the unsecured creditors claims will outweigh the landlords claims and thus they end up being crammed down. Trade suppliers and retained landlords happy, other landlords not so.

TRU’s CVA is no different with no less than 5 different classes of landlord, all being treated differently. So the big question is will the CVA go through?

A Broken Record?

Already there are stormy waters ahead. The Pension Protection Fund (“PPF”) has actively encouraged the Trustees to engage advisors to review the CVA proposals on the basis that they don’t want the CVA to be merely “kicking the can down the road”. I suspect they still have BHS very much in mind – that CVA failed, and BHS went into administration and the PPF had to fight to get money out of Philip Green.

It is reported that the Pension Fund represents over 20% of TRU unsecured creditors so will be a major player in the proceedings. So watch this space……..

The Greatest Misses

And the view of your ‘umble blogger? I wish TRU all the best and hope the CVA works. However although I’m not a betting man but the case for the prosecution m’lud is JJB Sports, Focus and BHS. All went through CVA’s that ultimately were not successful and subsequently went into administration. Fingers crossed.