New Look is seeking a three-year rent holiday on 68 of its stores and big rent reductions on hundreds of others as it battles to stay afloat and save the jobs of its 11,200 employees.
The fast-fashion chain is attempting to secure its second rescue deal in 18 months and, along with the payment holiday, is asking landlords to slash rents to between about 2% and 12% of sales – on a further 402 of its shops. Such rents are not only likely to be lower than current levels but more flexible in the event of further high street lockdowns.
New Look said its debt holders had agreed to inject £40m in new cash into the business and cut debts by about £440m to about £100m if landlords would agree to the rent cuts.
In return, landlords will be able to exit leases more easily if they can secure better terms elsewhere, raising the prospect that dozens of New Look stores will close.
Landlords and other creditors representing at least 75% of the value of the firm’s debts must vote to approve the rent-cutting deal, an insolvency process known as a company voluntary arrangement (CVA), at a meeting on 15 September.
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.
New Look has also given commitments not to drop the amount of rent paid by more than 15% year on year during the CVA period, no matter how stores perform, and to continue to pay service charges, including business rates.
If the deal does not go ahead New Look is at risk of collapsing, with the potential loss of more than 11,200 staff jobs and hundreds more agency workers at its warehouse.
The company’s banks and other lenders have promised to swap most of its debts for equity in the business in order to help keep New Look afloat. A buyer is being sought as an alternative source of new funds but it is thought unlikely one will be found in the current climate.
Nigel Oddy, the chief executive, said New Look was launching the latest CVA “out of absolute necessity”.
He said sales in stores that had reopened after lockdown remained down by more than 30% on average. The high streets remained quiet and it was not clear how long it would take for shoppers to return, he added.
Oddy said New Look’s latest ranges were doing well online and its strategy to broaden its appeal and offer good value on local high streets could succeed. “I firmly believe there is still a place for New Look in the retail market,” he said.
However, he said New Look could not continue to pay rents at historical rates. “[The] magnitude and speed of the shift in consumer behaviour and confidence nationwide requires a change in the way leases are structured in order to manage uncertainty so that stakeholders share both risk and upside, and to ensure continued business viability,” Oddy said.
“Covid-19 has changed the retail environment beyond recognition, accelerating the permanent structural shift in customer spend and behaviour from physical retail to online, which we have seen in recent trading. Despite this, we still fundamentally believe the physical store has a significant part to play in the overall retail market and our [online] strategy.”
