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House of Fraser settles legal challenge by activist landlord group over CVA terms

By James Wallace - Monday, August 06, 2018 9:37

House of Fraser (HoF) has settled the dispute with the group landlords which challenged the terms of its restructuring plan via a Company Voluntary Arrangements (CVA).

In a statement this morning, HoF said: “House of Fraser is focused on concluding discussions with interested investors as per the original timelines set out by the business and recognising the risks in and around this litigation has entered into this settlement now to remove any risk to those discussions presented by this legal process.” 

The group of landlords – which consist of Lunar Altrincham, which owns HoF’s Altrincham store, Autumn Properties, which owns a store in Birkenhead, and Eden Commercial, which owns a store in High Wycombe – believed that they were “unfairly prejudiced” during this process and there have been alleged “material irregularities in the implementation of House of Fraser’s CVA”.

The restructuring plan – approved by creditors including HSBC and Industrial and Commercial Bank of China on 22 June – proposed the closure of 31 of its 59 department stores including its Oxford Street flagship in London as well as major stores in Birmingham, Cardiff and Edinburgh.

As many as 6,000 jobs were likely to be lost as the retailer sought to transition to an ecommerce-led model. HoF had reportedly informally asked store landlords to agree to significant rent cuts earlier this year.

In a statement this morning, Mark Fry of Begbies Traynor and Charlotte Coates of JLL, who have been advising this group of House of Fraser landlords throughout the CVA process and subsequent legal challenge, said:

“Following our Petitions to the Scottish Courts on 20 July, we can confirm that our landlord group has reached an agreement in principle with House of Fraser in recognition of our claims. The terms of the settlement are confidential, but we can confirm that we have agreed to withdraw our legal challenge to the CVA.

“Although we will not have our day in court, we are pleased with the outcome and hope that our landmark legal challenge sends a clear message to any other companies considering a CVA, on the importance of transparency and fair treatment for all creditors throughout a CVA process.

“Landlords are always willing to enter into a proper dialogue with companies and their advisers with the aim of rescuing a business. However, the retail CVA process in the UK has become increasingly misused and prejudiced against landlords and needs correcting. CVAs were designed as a means to rescue a business, not simply a tool to shed undesirable leases for the benefit of equity shareholders.

“It remains our belief that applying a 75 percent arbitrary discount to the value of landlords’ claims is not the market norm and has no basis in law. We believe that thanks to our actions, landlords in future CVAs will be in a far stronger position to challenge what we regard as unfair treatment and demand greater transparency from companies and their nominees from the outset.”

The dispute was cited as the primary reason for delays in securing funding for C.banner International Holdings’ proposed 51% stake acquisition from from another Chinese conglomerate, Nanjing Xinjiekou, also known as Cenbest, which currently owns 89% of HoF. The remaining 11% is owned by Sports Direct, another long-term HoF suitor.

However, the proposed C.banner, the Chinese fashion conglomerate, deal still looks unlikely after reporting a profit warning last week, confirming the firm will swing to a six-month net loss of RMB 20m (£2.2m), driven by early redemption of convertible bonds and the appreciation of the US dollar against the renminbi.

“House of Fraser is a business that has been under-invested in for many years and that’s the ultimate reason for its failure,” said Mark Williams, president of retail property organisation Revo. “Landlords are motivated to work with the retail industry, as evident here, and absolutely want to avoid these situations, but the fact is that the inherent weaknesses of the CVA process remain, as this particular case demonstrates, and this needs to be urgently addressed by the industry and by government.”

HoF, ultimately majority owned by Sanpower Group as the controlling stakeholder of Cenbest, remains in talks with a small number of alternative investors including Philip Day, the owner of Edinburgh Woollen Mill Group, and Alteri Investors, as reported by Sky News, as well Sports Direct, which previously offered to extend HoF a £50m secured loan.

EY is expected to handle the administration in the event no deal to save HoF materialises and the 170-year old retailer collapses into administration.

James Wallace is a freelance consultant and can be reached via Linkedin or email: jawallace32@gmail.com

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