Carpetright proposes bruising CVA, slashes to property portfolio and an equity raising to stave off insolvency

By James Wallace - Thursday, April 12, 2018 16:13

Carpetright, the specialist floor coverings and beds retailer, has announced plans to close 92 retail stores in the UK as part of a wider property and financial restructuring which includes entering a company voluntary arrangement (CVA) to stave off insolvency proceedings.

This morning, Matthew Smith and Neville Kahn of Deloitte were appointed joint nominees of Carpetright in relation to the proposed CVA.

Under the terms of the CVA proposal:

  • 92 retail sites in the UK will be close across Carpetright’s portfolio;
  • 113 retail sites in the UK will benefit from revised lease terms including reduced rents; and
  • £60m in net equity capital will be raised by Carpetright through a placing and open offer on or around 18 May.

Carpetright said the £60m proceeds will be used to fund the beleaguered retailer’s on-going strategy, reduce indebtedness and cover the costs of the CVA.

The company has issued a raft of profit warning over recent years, including three in the last four months, as it has struggled to adapt its business model, which relies on new home buyers and regular home movers, to the brutal realities of e-commerce and the slowing pace at which Britons move home. Carpetright expects to report a “small” pre-tax loss for the year ending 28 April 2018.

The struggling retailer said: “The Board believes that the CVA Proposal, if approved and implemented as planned by the Company, will demonstrably give landlords of compromised sites a far greater return than the amount it is estimated that unsecured creditors would receive if Carpetright were to be placed in administration.”

Wilf Walsh, Carpetright CEO said the “tough but necessary actions” were due to the company’s “burden of a legacy UK property estate consisting of too many poorly located stores on unsustainable rents”.

Walsh added that Carpetright, as well as Smith and Kahn of Deloitte, engaged the British Property Federation (BPF) on how to manage the best interests for landlords affected by the proposed rental cuts in the CVA.

Stephanie Pollitt, assistant director of real estate policy at the BPF said: “These situations are never easy as landlords need to take into consideration the impact on their investors, including those protecting pensioners’ savings, as they vote on the CVA proposal. Ultimately, it will be for individual landlords to decide how they will vote on the CVA, but the proposal has sought to find a solution that works for all parties.”

In addition, Carpetright said a technical breach has been identified with respect of its borrowing powers. A separate circular containing proposed resolutions to ratify this breach will be circulated to shareholders.

Carpetright requires the approval of 75% in value of the unsecured creditors for the CVA to be effective.  Carpetright will seek creditor approval of the CVA proposal at a meeting to on 26 April and shareholder at a separate meeting on 30 April. Implementation of the CVA is also conditional upon the successful proposed £60m equity capital raising.

Property portfolio restructuring

Carpetright, together with its advisers, identified 205 sites in the UK that are underperforming, on unfavourable lease terms or now deemed non-core.

The property portfolio has been carved up into three categories:

-Category A sites (core locations which are performing adequately). CVA proposes to transition rent, service charge and insurance to a monthly for three years from next payment date;

-Category B: 113 sites (underperforming locations which are either marginally profitable or where property costs are above market and a rent reduction is necessary). CVA proposes transition to monthly rental, service charge and insurance payments and:

  • 30% rent reduction for 82 sites (B1 pool); and
  • 50% rent reduction for 31 sites (B2 pool).
  • Cartwright will have the right to terminate B2 pool leases on or after 18 months from the date on which the CVA is approved at the creditors' meeting. B1 pool leases can be terminated on the second and third anniversaries of the effective date.

-Category C: 92 sites (non-core locations which are underperforming and on unfavourable leases). CVA proposes closure of 92 sites on or after 23 September 2018, with reduced rent of 50 per cent.

A fund of £600,000 to be available to make payments to compromised landlords.

Financial restructuring

Carpetright’s CVA proposed £60m equity capital raising requires agreement from the company’s lenders to grant an extension of the company's revolving credit facility (RCF). The company is set to start discussions with the lenders.

In addition, Carpetright’s will also require £15m in interim funding as working capital until to support the company prior to receiving net proceeds from the equity capital raising.

Carpetright said it was “currently in discussions with ‘a key stakeholder’ in relation to obtaining this interim funding”.

Carpetright’ has approximately £58m of debt capacity split between a £45m revolving credit facility (RCF), a €7.4m term loan and overdrafts in both sterling and euros. RBS is believed to be among its lenders.

“Save for landlords compromised by the CVA, the CVA Proposal will not seek to compromise claims of any other creditors,” Carpetright said in a statement this morning.

Walsh added: “Completion of the CVA and equity financing will enable us to establish an appropriately-sized estate of modernised stores, on economic rents, complemented with a compelling online offer, enabling Carpetright to address the competitive threat from a position of strength.”

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

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