For good or bad, JJB’s rescue is a precedent
Like unemployment, insolvencies, keep rising even when the causes of recession are easing. That’s why it is vital to protect jobs during this stage of the economic cycle, but protecting companies is crucial too. JJB Sport’s rescue is important therefore.
The sports retailer is not significant as a company, even if it employs 12,000 staff. It imports Third World goods and sells them at high prices to people who do not need them: just the sort of firm to fail in a recession. But the creditors’ voluntary agreement – CVA – that has kept it out of administration is significant.
During the first stage of the recession such businesses would have been allowed to collapse into administration like MFI, Whittards or Woolworth. There might well have been a pre-pack agreement that ensured the business continued with the same management but left shareholders, bankers and suppliers with the loss.
Instead JJB’s creditors have decided a small loss is better than total write-off. In particular, the chain’s landlords have agreed, in exchange for £10m, to cancel the leases on 140 stores that will close: with administration they would still close, but without compensation. And the landlords are easing the chain’s cashflow on its other 250 shops by collecting rents monthly instead on quarterly in advance.
That suggests the property owners have accepted the need to be realistic since they rejected a CVA proposal in January by Stylo, the Barratts shoe group. Perhaps Stylo offered too little but it looks like landlords now concede that some rent is better than no rent and an empty unit that blights its neighbours.
The past alternative to messy administration would have been an even messier debt-for-equity swap. The CVA was achieved without even suspending dealing in the JJB’s shares.
But no rescue method works unless the business overcomes the problem that caused its cashflow problems. It must make an operating profit, at least on the part of the operation that survives. JJB’s CVA would have been impossible if it had not replaced its chief executive with someone tough and experienced like David Jones, the former Next and Morrisons boss.
It will be no bad thing if the trend for pre-pack administration turns into a period of CVAs. Shareholders, lenders, suppliers and staff all gain. CVAs will not work, however, if every troubled company turns to its creditors in the first instance for help without putting its own house in order. The danger of the JJB agreement is that landlords will be inundated with requests for leniency.
