Designer Debt: New Look undergoes second debt restructure in as many years

September 21, 2020

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3 min read

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What's going on here?

Struggling high-street retailer New Look has converted £440m of debt to shares in the company in a debt-for equity swap. This is the company’s second debt restructuring since 2019. It has also taken the first step in securing lower rents by renegotiating its leases in a Company Voluntary Agreement (“CVA”).

What does this mean?

A debt-for-equity swap involves the cancellation of outstanding debt in exchange for the allocation of shares in a company. These swaps are advantageous for a struggling company because they relieve the obligation to pay interest. Instead, the new shareholders will be rewarded with dividends, but only when the company is once again profitable. Moreover, the new shareholders can be given limited voting powers (as in the present case), meaning that company’s managers’ key decisions are less likely to be voted down.

A CVA is a procedure that allows a company to renegotiate its obligations to its creditors. To be effective, it must be approved by 75% of creditors by value and then ratified by over 50% of shareholders (also by value). New Look has secured creditor consent and is now awaiting the shareholders’ vote. If approved, the CVA will carry a number of benefits. Most importantly, New Look’s landlords have agreed to rent cuts under the CVA. Rather than fixed quarterly rent, New Look will now pay rent based on shop turnover in what is known as a variable lease (to see our article on that, click here). The CVA means New Look will now be able to pay less to its creditors without having to break ties with them. This is in spite of the fact that two of its landlords (British Land and Landsec) voted against the CVA but were bound by majority rule. The landlords may be disgruntled, but fortunately for New Look the CVA will also temporarily pause any ongoing claims against New Look, meaning that unpaid landlords and other suppliers won’t be able to take the company to court.

What's the big picture effect?

It is anticipated that New Look’s restructuring package will be approved by shareholders, but even still the company faces two wider problems. The first is plummeting footfall. New Look relies on its physical stores for most of its sales, and in-store sales have fallen by 38% since lockdown ended. It is therefore unsurprising that the debt restructuring is just one of the company’s reforms. New Look is also seeking a buyer who can inject more cash into the company. However, any restructuring will still face considerable challenges, given the stiff competition that the company faces from retailers such as ASOS and Marks & Spencer.

The second problem is that the debt restructuring may reduce New Look’s ability to raise finance in the future. Even though New Look has been able to extend the repayment deadline of its loans until 2023, the interest paid on these has increased. Likewise, New Look’s ability to issue new debt may be compromised. Its credit rating is currently sub-investment-grade. Debt-for-equity swaps frequently occur at a discount and are therefore often rejected by bondholders. For example, the value of the equity given in New Look’s 2019 debt restructuring was just 25% of the face value of the debt it replaced. Furthermore, the two debt-for-equity swaps have diluted New Look’s owner’s stake to just a fifth of the business, possibly reducing that owner’s appetite for further swaps and further dilution. New Look therefore faces difficult business and financial challenges in the years ahead.

Report written by Darinka Lipovac

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