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Analysis

The restructuring options for retailers before it’s too late for rescue

By Pauline Rigby, head of corporate at Forbes Solicitors

Despite a glimmer of hope that Government may extend more Covid-19 support measures, retailers shouldn’t leave their future to chance if they want to boost their prospects of surviving the pandemic.

Up until recent days, it looked like retailers were facing a so-called perfect storm. A moratorium protecting retail tenants against eviction during Covid-19 was due to expire at the end of March and business rates were due to recommence at the beginning of the new tax year, following a 12-month rates holiday for retail, hospitality, leisure and childcare businesses.

These circumstances meant that, unfortunately, failure was becoming more and more of a reality for hard hit retailers. The latest data from the UK’s number one insolvency score Red Flag Alert shows there was a 22% increase in the number of retailers in significant financial distress at the end of 2020, with almost 39,000 retailers now showing continued signs of deteriorating performance and little indication of reversing this trend.

Such failing retailers are likely to have breathed a sigh of relief following speculation that Government is planning to extend the moratorium. This will provide them with increased protection from being evicted from premises in the eventuality of not paying rent as a result of coronavirus. It gives them more of a fighting chance to build back when lockdown ends.

Although to some extent this may be true, struggling retailers will still be playing catch-up, even if they experienced the most miraculous of recoveries. Rent arrears will still need settling at some level in the future. It’s also worth considering that some may have leveraged Government-back Covid-19 business loans, which will require repaying.

Taking these points into account, retailers may want to look at the restructuring options for their businesses to help them build back better for the long-term. Restructuring is often overlooked by struggling companies until it’s too late for any real fighting chance of survival. One of the reasons for this is that a company in financial distress will tend to focus on quick wins to pay salaries and balance the books.

The notion of restructuring can sound a time-consuming process that doesn’t fit with keeping your head above water. This doesn’t have to be the case. There’s a number of restructuring options that struggling retailers can utilise to fend off failure – and time is of the essence.

Debt restructuring

The widespread impact of the pandemic has changed attitudes towards the management and repayment of debt. Creditors are increasingly pragmatic and willing to take a longer-term view of recovering money and maintaining relationships. This creates opportunities for struggling retailers to reorganise debt terms and conditions, which can deliver a noticeable impact on cashflow that benefits survival.

Essentially, the point to note here is that retailers in financial distress don’t have to wait for a formal insolvency process to do this. It’s possible to enter into informal discussions with creditors to explore what the options are. By acting earlier and drawing on the experience of professionals such as accountants or lawyers, retailers will find there are more debt restructuring options available such as covenant waivers, trading debt for equity and renegotiating payment amounts and interest rates.

Success in this area of restructuring will be rooted in clearly agreeing revised terms that balance the requirements of a struggling business and its creditor(s).

Company restructuring

A viable form of company restructuring for a retailer in financial distress could be a demerger. This can involve separating entities into different ownership structures to create distinct stand-alone companies.

Taking this approach can prove useful in protecting better performing parts of a company from other elements of the business that are more at risk of failure. Separating-off more successful parts of the retail operation with better prospects of survival and growth can assist the reorganisation of debt, strengthen the prospects of new investment or refinancing and concentrate operational focus on the high potential parts of the company that are more likely to drive survival and growth.

Employment restructures

Making redundancies is never easy and a step that many retailers will, understandably, want to avoid. Unfortunately, though, the reality is that a business experiencing a downturn in financial performance will not have the demand to justify all salaries. Efficiencies can be realised through a leaner workforce and acting earlier to address employment structures could prove the difference between making some redundancies and losing all jobs when the business goes into administration.

As part of an employment restructure, retailers should avoid taking a salary-only view towards making savings and also consider options for reducing contracted hours and job sharing before making redundancies. This will require consultation of employment contracts. Retailers should also ensure that the restructure considers any expenditure on third party suppliers and how outsourcing contributes to short-term performance. These steps could help leave the company in the strongest operational position for survival and also help avoid being left short in terms of capacity and ability when business picks-up.

Making restructuring work

Time and objectivity are key when it comes to restructuring. Dealing with a failing business and trying to fight-off administration is a tough task and, when business owners and senior leaders are in the thick of it, it can be easy to be blindsided by what the available rescue options are. Taking the time to step back and seeking an external expert view, from various perspectives from financiers, accountants or lawyers can boost chances of survival, rather than leaving it until it’s too late to turn things around.


Pauline Rigby is head of corporate at Forbes Solicitors.

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