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Wed 11th Dec 2019 - Chilango reveals details of CVA proposal
Chilango reveals details of CVA proposal: Bond holders in Chilango have been offered the choice to transfer their investments into shares in the company, or to cash out their investments at a rate of 10p per pound, as part of the burrito concept’s Company Voluntary Arrangement (CVA) proposal. Under the terms of the CVA, the company’s directors are offering the ‘non-critical creditors’, unsecured loan note and bond holders the options of preferred shares in the company, pending shareholder approval, (at 100% of the value of their debt), which attracts a dividend of 8% per annum, which is accrued until the principal and interest is repaid, either via an exit (sale of the company) or earlier (at the discretion of management); or a payment of 10p/£ in full and final settlement of their debt. Around 1,500 people became bondholders in the business across two mini-bond offerings in 2014 and 2019, which raised over £5.8m, with a promise of 8% returns. In a copy of the CVA document seen by Propel, which was filed yesterday, the 12-strong company, which was founded in 2007, had built up debts of £6.9m by the end of October. Although the company like-for-like sales were up by 7.1% year to date to November, it said that in an “ever more challenging market”, several factors had aligned to “significantly weaken the company’s cash position”. These included being unable to assign or sub-let its Bristol and Leeds leases – although it successfully assigned its Glasgow lease to Greggs; Rent increases on four leased properties in central London locations of which three had a material impact (a total increase of £0.1m (23%) per annum); it most recent opening in Birmingham being 25% behind budget following its launch in July; fire safety regulations forcing the business to relocate its head office from above its Islington restaurant to a paid-for office during FY2019; central costs increasing by £0.8m between FY18 and FY20 to help to grow sales, but the challenging trading conditions has meant sales haven’t grown as strongly as expected; sales not being as profitable as in the past due to rising cost challenges in this sector; and key creditors removing credit facilities amidst concerns about the sector. The proposal states, that as a result of these factors, the company must “now restructure its head office, debt structure and creditor base in order to address significant cashflow challenges, including a sizeable forecast deficit from January 2020 totalling £0.3m”. It also stated that while sales at the new Birmingham site have steadily increased over the past eight weeks, it is not yet profitable. At the same time, three more restaurants are marginally profitable sites but are at risk of becoming lossmaking in the event of sales pressure or continued cost inflation. As part of the CVA proposal, the company will exit leases for unopened sites in Bristol, Leeds and Brighton, plus its former site in Camden, now sublet to German Doner Kebab. It also proposes to cut rents by 40% at its sites in London’s Leather Lane, Birmingham and Boxpark Croydon. The company states that performance within the casual dining sector began to stagnate in 2016 and ultimately deteriorate. It says: “Consumer retail confidence took a downturn owing to uncertainty around Brexit, a rising cost base and lower high street footfall.” Given the contraction of the market, the company decided against developing the Leeds and Bristol sites it had leased, choosing to market the leases for assignment or sublease instead. The following year, the company lost an ongoing VAT appeal with HMRC and raised money via shareholder loans of and loan notes to cover the associated £1.3m liability and to support further growth. At this time, the directors looked to streamline the operation to ensure all sites were profitable. The next year, the company sought to raise £1m via a second mini-bond raise to both refinance debt and support its growth strategy, which included opening additional new restaurants, strengthening the support team and developing its online and delivery presence. The bond was over-subscribed and £3m was raised. The funds raised were used to service existing debts including a mixture of interest (£0.1m) and capital repayments (£0.5m) from the previous bond and loan notes (paid in September 2019), to cover some exceptional costs and pay various aged creditors, to open the company’s restaurant in Birmingham and invest in digital initiatives. Going forward, the company’s management are planning on reducing central costs by £0.5m per annum and believe the implementation of the CVA proposal will enable the business to “rationalise the leasehold obligations, materially improve the balance sheet, enhance the profitability of the business, permit capital site investment into the sites and thereby maximise the return to creditors and secure the employment of the majority of its workforce”. In list of non critical creditors, the largest is HMRC with £955,000 outstanding and in the critical creditors list the biggest creditor is Bidfood which is owed £197,000.


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