A lot of people have had to swallow bitter pills to help safeguard the future of New Look. Now one final group, landlords, is being asked to share the harsh medicine.
New Look, which had already undertaken a CVA a couple of years ago, has been forced to trigger the process once again in the wake of the Covid-19 pandemic – a crisis that threw turnaround plans awry as trading went into a tailspin.
In support of the retailer’s recovery ambitions, lenders are switching debt for equity. Their status as senior debt holders will be diluted, along with New Look’s debt burden, which will reduce from £550m to £100m.
“New Look has tried hard to recognise not just its own interests, but the interests of landlords, in the terms of the CVA”
At the same time, banking facilities have been extended and £40m of cash provided – which, incidentally, puts lenders below landlords in the pecking order when it comes to creditor prioritisation.
Those bitter pills are a sign that banks and bondholders believe New Look can ultimately be revived and represent a vote of confidence in its future.
Next Tuesday, New Look landlords will be asked to do their bit when they cast their votes on the proposal. For it to proceed, New Look needs the support of 75% of creditors by value. Without that, the refinancing arrangements agreed with lenders will fall away and the retailer could collapse.
Landlords are being asked to take a haircut as New Look seeks to move to turnover-based rents. Nobody expects them to like it, but the alternative – a New Look administration – is likely to leave property owners in an even worse predicament as the continuing fallout of the coronavirus catastrophe bears down hard on retail locations that were already under pressure.
A decent offer
The problems of retail property owners are evident in the collapse of Intu and tumbleweed town centres as shoppers switch online or stay away because of health fears. New Look is dealing with around 300 landlords and the fortunes of some of the smaller ones, which may own just a handful of stores, depend on the retailer continuing to trade.
New Look has tried hard to recognise not just its own interests, but the interests of those landlords, in the terms of the CVA.
First, any landlord that knows a preferable and more financially secure tenant – a breed in shorter supply these days than they once were – can trigger new break clauses and replace New Look as the occupier.
“New Look celebrated its 50th anniversary last year. If landlords do not support its restructuring, it may not be here next year”
Replacing the retailer with a business of similar ilk will not be easy. As JD Sports boss Peter Cowgill told Retail Week, the retailer has hit the pause button on store expansion plans and admits he would need “some pretty heavy persuading” to open shops in city centres or shopping malls at this time.
Other retailers will hold similar views, meaning the search for new occupiers will be a tricky task, at best, for property owners.
If landlords do want new occupants, they need to support the CVA in the first place. If they don’t and New Look goes under, landlords are likely to find that an administrator will be less well disposed to their concerns.
New Look has also pledged to pay unchanged service charges. Again, if the retailer goes into administration, that guarantee goes up in smoke and leaves landlords with another financial deficit to try to make up.
Lastly, New Look has proposed that the minimum rent it should pay in years two and three of the CVA period will be 85% of the previous year’s. That’s not a bad offer and provides landlords with greater visibility of cash flow over a substantial period.
Take the hit
Following the unsuccessful conclusion this week of efforts to sell New Look – carried out simultaneously with the launch of the CVA plan – the latter is now the only deal on the table. Unpalatable as it may be for some landlords, it is better than the alternative.
New Look chief executive Nigel Oddy wrote today to his landlords, urging them to back the CVA.
He said: “Our CVA has been launched out of absolute necessity. It is not a situation we would like to be in.
“We still fundamentally believe the physical store has a fundamental part to play in the overall retail market. We want to work closely with you to ensure we can navigate the uncertain times together and share in the upside.”
New Look celebrated its 50th anniversary last year. If landlords do not support its restructuring, it may not be here next year, never mind in another half-century.
Unless they are willing to hold their noses and take a hit, as other stakeholders are, landlords will face joining the queue at the administrators right behind New Look.
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