CVAs Primer

7/30/2019 CVAs Primer

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What is a CVA?

CVA proposalissued

Creditorsmeeting

CVA stands if unchallengedand scheme administeredin line with proposal

Month 1 Month 2 Month 3

14 days

Major creditors Members

28 day challenge period

A ro osal made b a com an to its creditors to com romise or settle its debts in some wa

It is a formal insolvency procedure governed by the Insolvency Act 1986

A very flexible tool proposals can be tailored to the exact situation (no two are ever the same).

Very rapid 14 days notice to creditors is all that is required, and the CVA becomes effective immediately

Requires the support of 75% of voting creditors (by value of debt), and is binding over all unsecuredcreditors

A members vote is also undertaken, but cannot override the wishes of creditors

1 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independentmember firms affiliated with KPMG International Cooperative, a Swiss entity. A ll rights reserved.


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The recent history of CVAs

The recent history is mixed and a number of Companies have subsequently failed since implementing a

CVA.

Stakeholder and public perception is that CVAs may not necessarily provide a better restructuring solution.

During 2009 and early 2010, there were a number of high profile CVAs, principally involving high street

retailers.

Since early 2010, the number of CVAs across the UK has fallen. The most high profile CVA in this period.

In recent times, we have seen many large retailers going into administration as a result of the challenging

trading environment on the high street, including La Senza, Game, Peacocks, Acquascutum, Past Times,

Clintons and Habitat.

n some o ese cases, we e eve a a cou ave een a v a e op on.

Since the start of 2012

we completed the successful CVAs of Bowlplex and Fitness First in the leisure sector,

, .

currently undertaking several reviews across the high street, hotel, leisure and care industry.

2012 has seen a resurgence in the CVA market.



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The recent history of CVAs (cont.)

Looking back, certain have been successful whereas others have seen mixed

results

BowlplexFitnessOddbins

Speciality

Sixt UK Blacks

eta

Limitedpor s

Leisure

Failure Success



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What can a CVA achieve?

Treat groups

of unsecured

creditors differently

Vary unattractiveterms

(e.g. quarterly

The continuationof a coreprofitable

. .

landlords)ease paymen s

us ness w t nthe legal entity,preserving jobsand stakeholder Assist

value operationalturnaround

where reduced

Compromise

contingent

footprint is

needed



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The value of CVAs

CVAs versus formal insolvency proceedings:

r nc pa van ages o a over nso vency

CVA Insolvency

Company often pays rates and some

rent on closed stores

Landlord pays rates on closed stores

Creditors only notified upon

involved throughout process

Protect core business

Business value damaged by

insolvency

Outcome for creditors better

May compromise terms of unattractive

Recoveries for creditors lower

IP may terminate unattractive leasesleases on day 1



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Stand alone CVA versus CVA via Administration

Key differences

Standalone CVA viaa m n s ra on

Likelihood of company surviving solvent restructuring ?Control returned to

Directors retain control directors once CVAapproved

Protection of moratorium against creditors (unless small co)

Trade creditors continue to be paid during process

No need to market business and assets for sale

os ve mpac

PLC possible to avoid share suspension

Lower rofessional costs

Better return to unsecured creditors than straightadministration



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CVA Ingredients for success

Viable corebusiness

Stakeholdersupport

STRONG COMPANYSIDE ADVISORS WITH

5

CONVICTION TOADVOCATE THE USE

Strongmanagement

Deliver onCVA terms

team

Ability to raise funds



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CVAs Lender concerns

Sustainability Lack of control

Value leakage

Cash flow

deterioration Execution risk



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CVAs Landlord concerns

Lack of

communication

Landlords taking

all ain

Com anies /

Nomineesinflexible

Non -

embarrassment

What happens

ost CVA?prov s ons



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CVA Ingredients for success (cont.)

Proposal comparison

JJB Focus Discover Suits Fitness Miss

Stand alone CVA noadministration

Earl and extensive creditorengagement (landlords)

New management notcoloured by previous failings ?

roac ve managemen o

process company & advisors

New money on acceptance ofCVA (new equity or financial

Agreement for monthly rents

Company retains responsibilityfor rates on closed stores

Approved by creditors andmembers

KPMG involved



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CVAs The reality (cont.)

The use of CVAs is beginning The idea that this CVA thing

the landlord occupier

relationship

Land Securities

May 2010

CEO, Kingfisher

23 March 2011

We have concluded this isnt

Landlords save more than,

CVAs

on JJB CVA

23 February 2011

22 March 2011



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Fitness First



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Facts and figures

Founded in 1993 under the slogan affordable fitness

Largest global player with 1.2 million customers worldwide

wne y nves men un s nce

Senior debt of 600 million

Approximately 150 UK clubs

Majority of UK leases guaranteed by UK parent of global business



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Key sector and company issues

Cost and marginpressure

Capitalrequirements

CompetitionDiscretionary

spend

High operational

gearing with rent,

utilities, equipment

Significant levels of

ongoing capex

required to maintain

Advent of the budget

operator model

offering no-frills

Falling domestic

incomes

Health and fitnesseases an s a

costs largely fixed so

very sensitive to

revenue falls

an mprove e

asset portfolio in

light of low customer

switchin costs

ac es or ow

pricesclub membership

typically considered

a luxury

Substantial debt servicing requirement

Distress!



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Restructuring headlines

The CVA

Platform allowin orderl exit from 67 ms to be transferred to other o erators over a six

month period at 55% of rent

Exit on similar terms from 14 sites sublet to other operators and from 8 dark sites

e uc on o ren y on a an u o s es or ree years w a ren re as ng on ex o

the CVA

Conversion of all lease property payments to monthly terms

Compromise of parent company guarantees for compromised leases (Powerhouserespected)

Establishment of 2 anti-embarrassment funds each containin a minimum in excess of the

Prescribed Part maximum

The scheme of arrangement

rans er o s ares y ex ng equ y o er or neg g e cons era on

Write off of senior debt in return for 75% equity

In ection of 100 million facilit on favourable terms for remainin 25%



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More facts and figures

Approval by 97.6% of creditors in total

Landlord vote alone was 75% including 60% of compromised landlords

Deals currently on the table for approximately 35 of the transfer sites

Standard member direct debit monthly attrition rate increased by only 0.2%

Challenge period expired



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CVAs The reality

There are some tensions. Corporates and landlords often have competing interests

and IPs working to find ways to satisfy these

Landlords have publicly expressed concerns but the level of support for CVAs

remains high A CVA is not a silver bullet and will not, on its own, prevent subsequent business

failure

CVAs remain a key tool for effective business restructuring

companies on the increase as part of wider restructuring or for tax reasons

A properly executed CVA has the potential to deliver a better outcome for alls a e o ers nc u ng en ers an a pre pac



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Disclaimer

The information contained in this document is of a general nature and is not intended

to address the circumstances of any particular individual or entity.

Although we endeavour to provide accurate and timely information, there can be no

guarantee that such information is accurate as of the date it is provided or that it will.

appropriate professional advice after a thorough examination of the particular

situation.

serv ces prov e y are su ec o e nego a on, agreemen an

signing of a specific contract



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2012 KPMG LLP, a UK limited liability partnership,

is a subsidiary of KPMG Europe LLP and a member

firm of the KPMG network of independent member

firms affiliated with KPMG International Cooperative, a

Swiss entity. All rights reserved.

The KPMG name, logo and cutting through

complexity are registered trademarks or trademarks

of KPMG International Cooperative (KPMG

.

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CVAs Primer