Friday, 22 June 2018

Glorious bit of landlord squealing

From the BBC, a few highlights:

Six thousand jobs are at risk in a drastic attempt to save [House of Fraser] from collapse. If the rescue plan fails, administration is likely. But High Street landlords are furious about the way they're being treated. They are the creditors who have to shoulder the burden of financial losses.

Many properties are owned by institutional investors who rely on store leases to provide a steady income stream for pension funds and insurers. Take the House of Fraser store in Milton Keynes. It's part of a shopping centre co-owned by Hermes Investment Management. Its rent generates long-term funding for two big pension schemes.

"Landlords are in an invidious position. We enter into these long-term contracts in good faith, with pensioners' income and security often at stake," says Chris Taylor, head of private markets at Hermes Investment Management.

House of Fraser is using what's called a company voluntary arrangement (CVA), a form of insolvency proceedings, to overhaul its business...

The plan requires approval from 75% of its unsecured creditors. All creditors get a vote, but the value of the vote depends on how much they are owed.

Under insolvency rules, landlords' claims are already heavily discounted because of how accountants judge their losses. The issue for landlords is that their "say" or voting rights in the CVA process is discounted by a further 75%, which they believe is grossly unfair.

The BBC understands that even if most landlords vote against the plan, they won't have enough clout to win the day.

"With landlords' voting power reduced by 75% of the value of their claims, the dice are clearly loaded against them in the CVA process," says Mark Fry, from the restructuring firm Begbies Traynor... "Even if the majority of landlords were to vote against the CVA, that would not be enough to stop it being approved in its current form, leaving landlords taking all the pain of the CVA process whilst House of Fraser's shareholder takes out £70m."

I'd never heard of that reduced-votes-for-landlords rule, but it sounds eminently sensible to me.


ontheotherhand said...

Just think of the pensioners, weeping! (and our performance track record). He should go on to insist that the government guarantees all rents. That way, Hermes could just agree to rent it out to whichever clown offered the highest rent, without having to do any pesky expensive due diligence on the business viability of the potential tenants, nor insist that they pay rent a year in advance and leave a big deposit.

mombers said...

Surely landlords are in a much better position than other creditors? They can just kick the shop out on default of rent, getting their principal back (i.e. the premises). Other creditors just have a paper claim on all of the assets of the firm, which has to be wound up and divvied amongst everyone absent a CVA. They could get pennies on the pound vs 100% of the building.

I think the real problem the landlords have is that they can't get the same yield on their principal if they kick the shop out. They (and their banks) are allowed to use imaginary numbers for valuations based on contracted rents, not reality. A bank can use a completely made up figure for a shop that has been empty for a year, whereas if it is let for the market rate they have to write it down. Terrible incentives.

Lola said...

It's all bollocks about pension funds too. Most pension funds have about 10% of property +/- 5%. It's a bloody awful asset class as it's so illiquid.

Mark Wadsworth said...

OTOH, mmm, government guarantees. Tasty!

M, the shop owner has lost precisely nothing even if he gets nothing in rent.

L, of course it's bollocks, it's just that they have a few spare Poor Widows In Mansions so they're using them here as well.

Bayard said...

From an article in Moneyweek:

"...and while landlords have the legal right to re-let the premises to tenants who are willing to pay more (than the reduced rents under a CVA), this is currently a struggle. Fewer than a third of the shops left behind by a bankrupt BHS have been let to someone else."

Well, duh, that just shows that the landlords were charging too much rent in the first place, doesn't it?