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Sat 13th Jun 2020 - Exclusive: The Restaurant Group CVA sets out plans to exit 148 leisure division sites
Exclusive – The Restaurant Group CVA sets out plans to exit 148 leisure division sites: The Restaurant Group (TRG) plans to exit almost half of its leisure division estate as part of proposals included in its company voluntary arrangement (CVA) document, as seen by Propel. The 214-page document, which was sent to landlords last week, sets out four lease categories, with the largest (category 4), comprising 148 sites, mostly under the Frankie & Benny’s brand, earmarked for closure as part of the proposals. It also warns if the CVA proposal is not approved or is otherwise not implemented, The Restaurant Group (UK), which is a wholly-owned indirect subsidiary of TRG plc, is “very likely” to enter into administration. The Restaurant Group (UK) currently comprises about 313 branded restaurants, with Frankie & Benny’s, Coast to Coast, Joe’s Kitchen, Chiquito, Garfunkel’s and Firejacks as the primary brands. The document states 72 sites are placed in category 1 leases, which will not have rental payments compromised because they are either strategically important to the leisure business or, in the vast majority of cases, benefit from a parent company guarantee, and hence it is not possible to compromise them in the same way as it could not be shown they would receive a better outcome in the CVA compared with an administration of the company. A total of 70 of the category 1 leases benefit from a guarantee from TRG plc. The other sites under the category 1 leases are expected to perform reasonably strongly assuming the effect of the covid-19 pandemic reduces in line with the group’s reasonable expectations. The proposals states: “As the restaurants at each of these category 1 sites have not operated since 20 March 2020, immediate relief is sought through the deferral of contractual rent arrears (to be paid on the first anniversary of the effective date). Where category 1 leases benefit from a guarantee given by TRG plc, the guarantee will remain in effect, including to guarantee the payment of the deferred contractual rent arrears on the first anniversary of the effective date. Other than this immediate relief, the directors do not consider any rent reductions or other compromises in respect of the category 1 leases are necessary, but do consider that moving to monthly payments in advance for rent and service charge to be necessary in order to assist cash flows. Insurance payments are not affected by the terms of the CVA.” There are 28 sites in the category 2 leases part, with the proposal stating prior to the covid-19 pandemic the directors had concerns over their long-term viability. The document states: “The rent at such restaurants is above market level and/or above a level that makes continuation of the restaurant commercially viable. The current closures and uncertainty have significantly exacerbated the situation and additional measures are required in relation to the category 2 leases in order for the sites to be commercially viable. With effect from the effective date, the annual rent payable by the company in respect of category 2 leases will be determined by reference to the higher of: (i) category 2 lease base rent (being 25% of contractual passing rent); and (ii) the category 2 lease turnover rent. This will provide relief for the business while the relevant sites are underperforming (for example, due to closures, continuing social distancing measures and/or reduced customer demand) and will give category 2 lease landlords a share in the upside in the event the relevant site performs well (while guaranteeing a minimum base rent regardless of turnover). Category 2 lease base rent and service charge will be paid monthly in advance, and any category 2 lease turnover rent will be paid quarterly in arrears and reconciled on an annual basis. Service charge, insurance and dilapidation claims will remain payable in full.” Similar to the category 2 leases, the directors had concerns over the long-term viability of restaurants under the category 3 leases – which comprises 62 sites – prior to the covid-19 pandemic. Again, as with the category 2 leases, the rent at such restaurants is above market level and/or above a level that makes continuation of the restaurant commercially viable. The document states: “Category 3 leases will therefore be treated on the same basis as category 2 leases, with the same rights to participate in the compromised creditor fund and profit share fund, except that category 3 lease base rent will be 10% of contractual passing rent and the effective turnover rent percentages for the purpose of calculating category 3 lease turnover rent will be lower. This reflects: the lower market value of the category 3 sites compared with the category 2 sites; and the more significant challenges faced by the category 3 sites and the corresponding need for greater rent reductions in order to make the sites commercially viable, but still gives the relevant landlords a minimum base rent and a potential share in the upside.” Prior to the covid-19 pandemic, the restaurants under the category 4 leases (148 sites) were significantly loss-making and are therefore “unsustainable in the near term”. The document said the directors believe there is no prospect of these restaurants returning to profitability, and as such there is no commercial case for these sites to reopen when the restrictions following the covid-19 pandemic are lifted. The company said for category 3 sites and category 4 sites, the number of uncertainties that exist due to the covid-19 pandemic means it is very difficult to predict with any certainty how deeply they will be affected. These uncertainties include but are not limited to when restaurants will be able to reopen; what restrictions will be placed on restaurant operations, such as social distancing and limits on cover numbers; whether there will be regional phased reopening of restaurants; the behaviour of consumers following the lifting of the restrictions and the willingness of consumers to dine out; and the costs associated with adapting restaurants and retraining staff. The proposals state: “Due to these uncertainties, and the need to ensure as many sites as possible have the potential to remain economically viable, the CVA proposal includes terms for category 2 leases and category 3 leases that link rental payments to performance of the site through turnover rent provisions. This reflects the difficulty the company has in predicting trading levels for sites both now and at least for the next 24 months, and consequently the difficulty in fixing the level of rent the relevant site can support.” The proposal document also states TRG plc is continuing to explore additional financing opportunities for the group – The Restaurant Group (UK) – but does not expect these to be available unless the company has achieved a leasehold restructuring. It states: “As such, without the approval and implementation of the CVA, the group will not be able to continue supporting the company – The Restaurant Group (UK) – and it is very likely the company will enter into administration. Given the state of the current market, and the expected performance of the leisure business without the changes to be implemented by the CVA proposal, it has been assumed there would not be a buyer for the business and that it would not be sold as a going concern. Instead, it has been assumed an accelerated asset sale would be undertaken. Due to the rental market and the subsisting terms of the relevant leases, it has been assumed no third party would purchase the category 2 or category 3 leases. The relevant leases would therefore offered for surrender and/or disclaimed in a subsequent winding up of the company and the relevant landlords would claim for their resulting loss. The same assumptions applicable to category 2 leases and category 3 leases apply to the category 4 leases, namely there will be no third-party purchaser of the category 4 leases and the relevant landlords would claim for their resulting loss in a subsequent winding up of the company.” The creditors’ meeting and separate shareholders’ meeting to vote on the proposals will take place on 29 June.

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