House of Fraser’s rescue restructuring faces a significant hurdle after it emerged that the department store chain may have to fund a multimillion-pound injection into its pension scheme.
The ailing retailer could be required to set aside a significant sum in order to secure the support of the pension protection fund (PPF), an industry-backed body that bails out troubled schemes.
House of Fraser to close stores as part of restructuring deal
The department store has approached the PPF as it plans to close stores and cut rents via a company voluntary arrangement process, a form of insolvency that must be approved by creditors. Without the support of the PPF the CVA may fail.
Industry experts suggested House of Fraser will have to consider closing at least 20 sites under the CVA to ensure a viable future.
C.banner, the Chinese firm that bought a 51% stake in House of Fraser’s parent company this week, has pledged to buy further shares for nearly £70m, some of which will help support a turnaround plan. It is thought the PPF may ask that some of these new funds are diverted to the pension scheme.
The department store runs two defined benefit schemes that together are in a surplus by just under £100m on an accounting basis in the latest calculation in March this year.
However, the insolvency process automatically triggers the involvement of the PPF. It will be counted as a creditor in the CVA process, partly because House of Fraser’s pension schemes are understood to be tens of millions of pounds in deficit on a buyout basis, a more stringent analysis that considers the cost of passing on the liabilities to an insurance firm.
John Ralfe, an independent pensions expert, said the schemes were likely to be significantly in deficit. “Sorting out House of Fraser’s two pension schemes – with total liabilities of more than £600m in March 2018 – makes a CVA more difficult,” he said.
The PPF forced Toys R Us, the collapsed toy retailer, to pledge £9m in additional funding to support its scheme before agreeing to back a CVA in December last year.
It does not always demand cash, however. The PPF backed the recent CVA by Carpetright after being satisfied that the company’s existing plan to tackle the £8.5m deficit over a number of years was sufficient.
The PPF said it would not comment on the circumstances of “ongoing companies.”
House of Fraser is also in talks with the Pensions Regulator over the impact of the C.Banner deal on its schemes. A spokesperson for the watchdog, which can demand that companies take action to protect pensions, said: “We are in discussions with the company and the trustee of the pension scheme and will continue to monitor the situation. We will not comment further unless it becomes appropriate to do so.”
The C.banner buyout involves the acquisition of shares in House of Fraser’s parent company from Nanjing Cenbest, part of China’s Sanpower conglomerate, which will retain a minority stake.