Poundland - a pre-arranged restructuring plan

Interesting features of the RP

• “Pre-arranged” RP: The RP is novel in that its terms were negotiated and agreed with Gordon Brothers – and a restructuring support letter was agreed - prior to the sale of Poundland, and all of the offers for Poundland that were received during the sales process anticipated a restructuring. The PSL was also posted to creditors on the same day and the next day after the sale completed. From the perspective of Pepco, who Norris J accepted was a “responsible owner and seller”, this provided comfort that Poundland would be supported post-sale as it sought to implement its turnaround strategy. It also allowed the RP to be distinguished from the concerns expressed by Snowden LJ in Re Petrofac regarding the marketing of the exit financing; as Norris J commented, “The eventual allocation results not from some arbitrary choice by Pepco but from a robust and competitive sale process focussed upon the purchaser willing to provide the most post-sale finance to support the business in its attempted preservation”. 
• Landlord engagement: Due to the ongoing sales process, Pepco’s public listing and Poundland’s large and diverse landlord base (which increased the risk of the sale being leaked), Poundland was unable to engage with landlords on the terms of the RP prior to the launch of the PSL. However, Poundland had sought to negotiate consensual adjustments before the RP was launched and there was significant engagement with Poundland’s material landlords and the British Property Federation (BPF) after the PSL was launched, causing Norris J to comment that “Poundland has made serious attempts to engage, in particular, with its landlords”. This appears to show some flexibility on the nature, timing and extent of the creditor engagement that is required prior to the launch of a restructuring plan, where the plan company is able to articulate the rationale for the approach taken.
• Upside sharing: Upside sharing mechanics appeared in CVAs previously but have not until recently been a common feature of Part 26A restructuring plans. Applying the now-discredited “Virgin Active approach”, where the views of unsecured creditors do not carry significant weight provided that they are left in a better position than under the relevant alternative, there would have been no need to offer landlords any share of the potential upside created through the restructuring plan. However, upside sharing mechanisms were features of both Poundland’s and River Island’s recent restructuring plans and may become more common in the future following the Court of Appeal’s decision in Re Petrofac as a way to seek to ensure that the benefits of the restructuring are being shared fairly amongst plan creditors. In the Poundland case, the upside sharing mechanism – which was revised following the convening hearing to make it more generous towards unsecured creditors – provided for a proportion of EBITDA over a minimum threshold to be paid to unsecured creditors, with that proportion ratcheting up as EBITDA increased.
• Allocation of benefits report: Following its use in the Independent Building Merchants Group’s inter-related restructuring plans, Poundland engaged FTI to provide an allocation of benefits report which sought to quantify the contribution made and benefit received by each creditor class. However, at the sanction hearing, Norris J noted the limitations of such a report, including that it does not take account of all the beneficial aspects of the RP and “treats the repayment of new money advanced on market terms (or indeed, at below market rates) as a benefit received under the plan”. It will be interesting to see if similar reports are produced as evidence in future restructuring plans or whether plan companies adopt different approaches to demonstrating that their restructuring plan provides a fair allocation of restructuring benefits. One potential approach – rather than seeking to quantify contributions and benefits – could have been for an expert to provide a qualitative view of whether the benefit being received by each creditor class as compared with the contribution being made was reasonable in their opinion.
• Retention of equity: A key focus in designing the RP was in ensuring there was sufficient contribution from Bidco and from Pepco to justify Bidco retaining its equity stake in Poundland (albeit diluted through the issue of shares to Pepco and management) and in Pepco being issued a minority equity stake in Bidco through the RP. Norris J took a commercial and holistic view in concluding that there was “no basis for holding that…the allocation of equity is unfair vis-à-vis the landlords and other creditors”. He accepted that through its contribution, which included providing a substantial overdraft facility at a preferential rate, Pepco had “subordinated its financial interests to its desire to preserve the business” and therefore had a “strong voice in the allocation of any benefit”. In Bidco’s case, Norris J placed weight on funding advanced to create liquidity runway, even though this was provided before the RP, and on the availability of Gordon Brothers’ turnaround expertise at no cost in supporting Poundland’s turnaround efforts. This serves as a useful reminder that there remains considerable flexibility under Part 26A restructuring plans for shareholders to retain their equity position where justified by the circumstances, a feature which sets it apart from restructuring mechanisms in the US and Europe. 
  
  Slaughter and May worked with Pepco, Poundland, Teneo and the counsel team of Tom Smith KC, Georgina Peters and Madeleine Jones in the design phase of the RP prior to completion of the sale. Following the sale and launch of the PSL, Slaughter and May worked with Ryan Perkins and acted for Pepco in its capacity as secured and unsecured creditor of Poundland, and as the future holder of a minority equity stake in Bidco following the sanction of the RP.

The terms of the RP