The Sports Direct founder, Mike Ashley, has held talks about an emergency funding deal for the struggling department store chain, House of Fraser.
The billionaire, who already owns an 11% stake in House of Fraser, was asked in recent days by bankers advising the retailer to consider providing it with a £50m loan, according to a report by Sky News.
In June, House of Fraser announced plans to close 31 of its 59 stores, putting 6,000 jobs at risk. The retailer later secured breathing space from its lenders when they agreed to extend loans while it carries out the restructuring under a company voluntary arrangement scheme.
C.banner, the Chinese owner of Hamleys, had agreed to make a £70m investment in House of Fraser, conditional on the CVA being implemented.
What is a company voluntary arrangement?
A company facing financial difficulties prompted by heavy debts can apply for a company voluntary arrangement in order to avoid administration or other more disruptive forms of insolvency.
It is a legally binding insolvency process in which a company cuts a deal with creditors on unsecured debts. In retail, this usually involves asking landlords of poorly performing shops to reduce rental payments or allow the company to exit leases on stores which they would otherwise be bound to for long periods.
Companies hire an insolvency practitioner to assess the business and whether a CVA has a reasonable chance of success. They then produce a CVA proposal which may involve changes to the terms of leases or termination of onerous supply or employment contracts.
In order for a CVA to go ahead, the company must call a meeting of unsecured creditors, which may include suppliers and landlords. For the CVA to be approved, creditors who are owed at least 75% of the company’s total unsecured debt must vote in favour. At least 50% of creditors who voted for the CVA must not be connected to the company.
Once approved, the company can continue trading as usual and all unsecured creditors are bound by the deal, even those who voted against it or didn’t vote at all.
Creditors are often willing to support a CVA in the hope of recovering more cash than they would if the company went into administration or liquidation. They hope that reducing debts will help create a viable company that can continue to trade and pay them.
The process is popular with managers because they usually remain in charge of the company and it is cheaper than other forms of insolvency.
However, the CVA plans have been thrown into doubt by a legal challenge in Scotland, where a group of landlords argues that the restructuring plan would inflict unfair financial pain on them.
Alex Williamson, the chief executive of House of Fraser, has previously described the CVA as the “last viable” option for the business.
Days after the restructuring scheme was announced, Ashley won a legal challenge to obtain the store’s business plans, providing him with vital information in the event of an investment bid.
Ashley bought his 11% stake in 2014 when 89% of the business was sold to Chinese conglomerate Sanpower in a deal worth £480m.
The Sports Direct founder also has a 29.7% stake in Debenhams and strategic investments in businesses including Goals Soccer Centres and French Connection.
House of Fraser is one of a number of retailers to seek controversial CVAs as some of the biggest names on Britain’s high streets struggle to cope with rising costs, weak consumer confidence and competition from online-only rivals such as Amazon.
Poundworld, Toys R Us and Maplin collapsed earlier this year, while the likes of Prezzo, Byron and Jamie’s Italian have shut restaurants and cut hundreds of jobs.
