Pre pack administration — the word on the (high) street

The chain was the latest in a line of retail and hospitality stalwarts that have struggled in the face of stagnant disposable income and declining customer numbers. And with customer demand and shopping patterns continuing to evolve, the ripple effect is likely to continue into 2020.

So what’s behind this trend?

Unlike the recession, businesses are not necessarily failing because of pressure from creditors, although that is still a significant factor, rather it’s because their order book or customers have simply dried up. Businesses facing insolvency may be well managed and have a viable sales model, but the market or need for their services has simply declined.

Retailers coming under pressure often cite the “death of the high street” and there is some truth in that. The rise of online shopping means customers need never set foot inside a store, instead, they can browse online when it suits them, and can expect fast delivery. Plus, with many retailers offering free shipping and returns, what’s not to like?

In contrast, the high street retailers have significant increased overheads that their online competitors largely avoid: rent and rates.

Early action and intervention

When faced with dwindling sales, retailers have difficult choices to make.

A business that seeks advice while it still has cash has many more options. Ultimately a view may be taken that the business simply cannot survive long-term, but reaching that conclusion while the business is still solvent allows the directors to decide how to manage that decision. It puts them, rather than creditors, in control.

Sadly not all companies have that luxury.

They have battled on for too long and find themselves backed into a corner by creditors. For those companies there are still a variety of options. House of Fraser explored entering into a CVA whereby it attempted to reach a compromise agreement with its creditors. That ultimately failed and it entered administration.

The assets were sold the same day to Sports Direct in a deal known as a pre-pack administration. Debenhams’ collapse followed a similar route when it entered administration and was immediately bought by its lenders.

Pre-pack administrations have received bad press, somewhat unfairly. While the perception is that creditors lose out and the company is allowed to trade on debt free, it’s rarely that simple.

Unlike a regular administration, in a pre-pack the sale of the business or its assets is agreed prior to the appointment of the administrators. This comes after careful scrutiny of the asset’s value, the price being offered and the purchaser’s ability to complete the transaction.

The sale then takes place immediately upon the company entering administration, or very soon thereafter.

The aim is to allow the business to continue trading and preserve the value of assets. That helps minimise losses to creditors and job losses. The administrators can then use the funds received from the sale to pay creditors and the business can (hopefully) continue trading, albeit under different ownership.

Chances are that through this process we’ll continue to see those down-but-not-out big names on the high street.

Without doubt retailers must work harder and smarter to retain customers. Traditional offline sales models which have served them well for generations are no longer fit for purpose — something both Debenhams and House of Fraser have discovered.

We appear to be going through a time of structural change, with well-known household names the casualties. There are no easy answers, but taking advice at an early stage is key to keeping control and minimising the impact.