By Keith Hinds, Partner in the Pensions Advisory Team, Grant Thornton UK LLP
Rewind just over a year and things were looking pretty bleak for both Uniqplc's pension fund members and itsshareholders. The Scheme's c£400m deficit was almost certainly going to drag what essentially was a profitable business into insolvency at some time in the future,and there was much deliberation between the Pension Protection Fund (PPF), the pension fund's trustees and the Uniq management on what was the best course of action.
Whilst Grant Thorntonwere originally instructed by the PPF to advise on the options it hadin dealing with the Uniq scheme, by working closely with all parties, we were able to help facilitate a 'pension debt for equity' swap, whereby Uniq was removed from its commitment to support the Scheme in exchange for the Scheme taking ownership of just over 90% of its share capital. This capital was held by Angel Street Limited, a new company specifically formed for the purpose of the restructuring, which became the sole employer to the Scheme, under a Regulated Apportionment Arrangement. Angel Street was designedpurposefully to fall into administration thereby triggering the start of a PPF assessment period in relation to the Scheme. Grant Thornton was appointed administrator, with the Uniq pension scheme as the sole creditor. We immediately started a sale process, with interest registered from a number of parties. Ultimately a sale of Uniq to the Greencore Groupwas agreed for £113 million and the takeover was completed over the summer. We believe this resulted in the best outcome possible for the scheme members, whilst still allowing Greencore to develop the Uniq business.
This was the first time a deal such as this had been executed, but is this approach unique or can it be replicated to enable other businessesto escape the burden of their pension scheme? The solution itselfwas not dissimilar to any other scenario where the PPF has accepted a scheme into assessment through a consensual restructuring. It required a number of essential ingredients to be addressed;a demonstrably better return for the scheme than on an insolvency of the employer;all creditors to be treated fairly; andthe PPF to have a stake in the on-going business. However, the main hurdle which anemployer will need to overcome is to establishthat insolvency of the employer would be inevitable. Any proposal for a consensual restructuring with the PPF will require this inevitability to be robustly tested by the trustees of the scheme, the PPF and their respective advisers. In the case of Uniq there were specific circumstances which enabled this test to be satisfied, despite the underlying profitability of the employer.
Even if it is agreedthat something must be done to avoid insolvency, a restructuring proposal will not be acceptable if the PPF is to receive less than would be achieved through an insolvency, and it should be remembered thatdeferred and contingent mitigation will always be treated with caution. The Uniq deal involved a combination of immediate and future mitigation sufficient to get over these hurdles.
Ordinarily, proposing a solution which results in all creditors being repaid in time at the expense of the scheme is not acceptable. If a lender in an insolvency is likely to suffer a loss, any consensual proposal should expect the PPF to require the lender to bear some of the pain through a write off or partial debt for equity swap for example.
Taxation treatment is also an issue in most consensual restructurings. It played a part in Uniq, where Revenue clearance was crucial in avoiding significant potential adversetax consequences. This too has been a feature in a number of other consensual restructurings and should be expected to be a major area where specialist input and planning at an early stage prevents unnecessary delay and cost at the end.
Although there are potential solutions for all stakeholders where the DB scheme can be shown to be too great a burden for the employer to bear; few are truly unique. They must all address the PPF's consensual restructuring requirements, which are driven by the fact that the purpose of the PPF is to act as a lifeboat in circumstances where the employer becomes insolvent; not merely to lighten the load for shareholders who would like to improve the competitiveness of their business to drive out more value for themselves.
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