UK mall operator Intu collapses into insolvency. Thousands of jobs are at risk

Britain is already facing its steepest recession in 300 years, and expected to suffer the worst coronavirus-induced slump of any major economy this year. It's also risking a rupture with its single biggest trading partner, the European Union, if a new trade deal is not agreed soon.

Tens of thousands of jobs have already gone in energy, banking, aviation and aerospace and now many more are at risk after Intu (INTU), one of the United Kingdom's largest shopping mall owners, said Friday that it is entering administration. The company has debts of £4.5 billion ($5.6 billion) and was unable to agree repayment holidays with its creditors. Its shares, which have been on a downward trajectory for several years, plunged 54% on Friday before they were suspended.

Intu owns 17 UK shopping centers and two in Spain, accommodating 800 brands and 400 million shopper visits a year, according to the company. These centers will remain open during the insolvency process and individual retailers will have to enter transitional agreements with the administrators, KPMG.

But UK retailers are themselves suffering from a collapse in sales and many have been unable to pay rent for the upcoming quarter, raising questions as to how many of the shopping centers can realistically afford to remain open.

Just 14% of the rent owed by UK retailers for the third quarter of this year was paid on June 24, the due date, according to property management platform Re-Leased.

"We expect there will be more pressure to come," Re-Leased CEO Tom Wallace said in a statement Friday. "The temporary ban on evictions for non-payment of rent and the government furlough scheme is providing a lifeline to many tenants at the moment, but those measures will not last forever," he added.

Intu said it received just 29% of second quarter rent from tenants, down from 77% for the same period last year. Intu, which employs 2,600 people, was in a tight spot going into the pandemic. It posted a £2 billion ($2.5 billion) loss last year.

News of its collapse into insolvency will come as a particularly bitter blow to retailers because it coincides with a loosening of lockdown restrictions in the United Kingdom that has allowed stores to welcome customers again for the first time in months.

Brands such as Zara and H&M (HNNMY), which have already suffered steep sales declines this year, have outlets in malls owned by Intu. H&M said Friday that worldwide sales fell 50% from March through May, while Zara owner Inditex, the world's biggest clothing retailer, reported a 44% drop in sales for the three months to March. Both brands plan to accelerate store closures and a shift to online retailing — one of the few bright spots in the pandemic.

Only grocery stores and online retailers have dodged the slump in UK retail sales over the past few months, with the pandemic accelerating a move to e-commerce that was already hurting physical stores. Both the volume and value of retail sales suffered record declines over the three months to May, falling by 14% and 13%, respectively, when compared with the previous three months, according to the Office for National Statistics.The proportion spent online soared to the highest on record in May at 33.4%, breaking April's 31% record, according to ONS.In the United States, several major chains, such as JCPenney and Neiman Marcus, have already filed for bankruptcy and as many as 25,000 physical stores are expected to permanently close this year, driven partly by the continued shift to online shopping, according to Coresight Research. More than half of the store closures are expected to come in malls.

Source : CNN Business


IAG airline Level Europe files for insolvency

Austrian short-haul budget carrier Level Europe plans to file for insolvency, it said on Thursday, becoming the latest airline casualty of the coronavirus crisis despite the financial might of parent IAG <ICAG.L>.

The small airline, previously known as ANISEC, began operating in 2018. It has six Airbus short-haul jets and is part of IAG-owned Vueling Group.

British Airways owner IAG also operates a long-haul airline called Level, which is separate from Level Europe, an IAG spokeswoman said.

Level Europe blamed the COVID-19 pandemic for its move to cease trading, joining a growing list of airline failures after planes across the world were grounded for months during coronavirus lockdowns.

Anglo-Spanish group IAG, which also owns Iberia and Aer Lingus, said in April that it had 10 billion euros (£9 billion) of liquidity, but Chief Executive Willie Walsh has said it is burning through cash as the crisis continues and has warned that British Airways is "fighting for survival".

British Airways has said it needs to axe 12,000 jobs.

While IAG's airlines have used furlough schemes and accessed government-backed loans, they are not in line for government bailouts like European rivals such as Air France-KLM and Lufthansa.

An administrator will be appointed once insolvency proceedings have been filed, Level Europe said in its statement.

Source: Yahoo Finance


Insolvency law shake-up will hurt UK pensioners

Sector says that emergency measures hand too much power to banks
The UK pensions industry has warned that emergency measures aimed at helping struggling businesses during the coronavirus pandemic could leave millions of pensioners worse off. In recent weeks the Pensions Regulator, the Pension Protection Fund and trade bodies representing retirement schemes have raised concerns with the government that the Corporate and Governance Insolvency Bill could have serious unintended consequences for retirement plans and their members.

The legislation, which is being fast-tracked through parliament, aims to ease the burden on businesses hit by the Covid-19 crisis by giving them breathing space of up to 40 days to pursue a rescue plan. During this period they are shielded from legal action and paying debts, including those pursued by the Pensions Regulator for unpaid contributions.

However the pension industry fears that, in its current form, the bill hands too much power to creditors like banks at the expense of pensioners, in the event that a company goes bust with a big pension deficit. “This new moratorium will make recovering unpaid pension contributions even more difficult than the current situation,” said the Pensions and Lifetime Savings Association, the trade body which represents more than 1,300 workplace pension schemes.

“By the time action can be taken, it may be too late for a DB scheme or the PPF to recover anything.” The PPF is a statutory lifeboat scheme that is intended to protect members if an employer sponsoring a defined benefits pension plan becomes insolvent. With the new legislation, a concern for the pension industry is that the proposed moratorium risks blowing out an existing pension funding hole, with trustees in a weaker position to recover unpaid contributions.

Currently, if a business goes bust with an underfunded defined benefit pension plan, the scheme has a right to seek funds from the insolvent company with the pension debt ranking alongside other unsecured creditors such as bank loans. But the draft bill would “dramatically alter” this by giving lending debts that fell due during the moratorium period “super priority”, according to the Society of Pension Professionals, a trade body — effectively pushing pension schemes further down the creditor queue.

“The result is that on a restructuring or insolvency, other unsecured creditors, including defined benefit pension schemes, may suffer materially worse recoveries,” the SPP said in a letter sent to the government this week. “This outcome will inevitably lead to more pensioners not receiving their benefits in full and greater strain on the Pension Protection Fund.”

The trade body said the new measures raised the “serious risk of systemic dumping” of DB pension schemes by financially distressed companies because the proposals weakened the influence of both trustees and the PPF during restructuring talks. “Currently, trustees and the PPF are able to get a seat at the table during restructuring talks, but it is more difficult for them to do so under the new rules,” said Tiffany Tsang, senior policy lead on DB schemes at the PLSA.

Since 2005, the PPF has recovered more than £3bn from failed businesses. This cash has been used to help fund compensation payments to hundreds of thousands of members transferred to the pensions lifeboat, which is mostly funded by a levy on solvent schemes. A PPF spokesperson said: “We’re working closely with [the] government to address the concerns that have been raised about specific provisions in the bill, and to make sure pension schemes and the PPF aren’t disadvantaged.“

A spokesperson for the Pensions Regulator said: “We can confirm we are working closely with the government and the Department for Business, Energy and Industrial Strategy and we are very mindful of the concerns the industry have expressed around the Corporate Insolvency and Governance Bill.” The government said: “This legislation, widely supported by business groups, will help companies through the Covid-19 emergency by giving firms essential breathing space to seek a rescue – ultimately, preserving jobs and livelihoods. “We are working to ensure that pension schemes are not disadvantaged by these important measures.”

Source: Financial Times


UK insolvency law poses hefty losses for government-backed loans

The UK government could face hefty losses on loans made to struggling businesses during the Covid-19 pandemic due to its new insolvency law that can force lenders to accept unfavourable terms during a debt restructuring process.

The new ‘Restructuring Plan', part of the government's Corporate Insolvency & Governance Bill being debated in parliament this week, empowers one class of creditors to force a debt restructuring plan on another class of creditors, in what is known as a cross class cramdown.

It therefore gives a majority of creditors the power to force a debt restructuring onto a single class of creditors who do not agree with it.

This could result in the government having to accept debt write offs on Coronavirus Business Interruption Loans (CBILs) and Coronavirus Large Business Interruption Loans (CLBILs), which are 80% guaranteed by the government.

“We expect to see restructurings in the second half of the year that include these (government guaranteed) bank loans,” said one restructuring lawyer. “Under the new laws you can now cram down a single class -- it would be ironic if this class was these loans.”

The new law requires 75% of lenders, based on value across all the classes, to approve a debt restructuring. This is a far lower hurdle to overcome than the current UK scheme of arrangement system, which requires 75% by value and 50% of creditors in each class to approve the plan before it goes to court. The new law has the ability to cram down a dissenting class unlike the old system.

SUSCEPTIBLE

Some £8.9bn of CBILs were approved by the end of May, providing small and medium-sized businesses with loans of up to £5m each. The vast majority of the loans are unsecured and sit lower down the capital structure, making them susceptible to the will of higher-ranking lenders.

“There is no carve-out in the bill for CBIL loans, and so yes, they could be written down as part of a restructuring. The bank that provided the CBIL loan would be able to rely on the government for a shortfall of up to 80% of the loan,” a second lawyer said.

The loans could be written off completely or they could end up as part of a debt for equity plan, with the government left holding equity stakes in businesses.

“I think a lot of CBILs will be converted into equity – the government could end up the largest minority equity holder in the UK,” a second lawyer said.

 SLOW TAKE-UP

CLBILs, which provide larger corporates with loans of up to £200m, will mainly be secured. As they will rank on an equal basis to existing senior secured lenders, the debt is less likely to be crammed down.

However, the situation is complicated by the fact that existing senior secured lenders have to agree to a dilution of their security when a company takes a CLBIL. Restructuring advisers believe this is why the take up of these loans has been so low, with only 154 agreed so far.

It could also create a more complicated restructuring process where senior secured lenders become pitted against each other.

“Normally secured lenders would form one class in a restructuring, but there is scope for gerrymandering where some secured lenders form a different class and try to override another,” a third restructuring lawyer said.

Under the new bill, there are some safe guards against this as a court has to be satisfied that none of the dissenting classes would be any worse off under the plan than they would be in the event of an alternative process such as a liquidation.

However, the final approval of the plan lies with the judge.

 “It is a bit of a blunt instrument as it is. It will come down to how competent a judge is in understanding what is fair and what the motivations are of the different classes of creditors,” a fourth restructuring lawyer said.

Source: Yahoo Finance

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