The British Property Federation has praised Wigan-based JJB Sports for sealing a company voluntary agreement to avoid going into administration.
However, BPF 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.
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.
BPF said 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.
Brian Green, head of restructuring at KPMG in the North West and supervisor of the CVA, said: "While the CVA is but one element of JJB's plan to turn its fortunes around, it is a vital cog in the mechanism that will put the business in a stronger operational position and, ultimately, avoid administration. The proposal process has given both the company and its creditors the opportunity to agree a compromise that is mutually acceptable. We estimate that the landlords accepting a reduced rent can expect to see a substantially larger return via the CVA than in the alternative of administration: 24.6p to 29.2p in the £1 versus 1.1p in the £1.
"We have worked hard to improve the CVA model and – while a CVA must always offer a better return to creditors than administration – we have also been mindful of specific concerns voiced by the landlord community. To this end, the landlords have welcomed the opportunity to share in the upside of the turnaround via the 'clawback' mechanism."
JJB 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 was 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 75% vote on Tuesday 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, added: "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."
JJB's company voluntary agreement is a complicated restructuring involving multiple capital raises; interlocking CVA proposals and a business turnaround package all of which depended on the CVA being passed.
The CVA will now involve the following steps:
- 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 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 on 23 April 2013