PPF praised for tough line on Toys R Us insolvency talks

The PPF announced on Tuesday that it would veto the terms of a Company Voluntary Arrangement proposed by the company, and expressed disappointment that the company had not met its demand for £9m to be injected to the scheme.

A CVA involves negotiating with creditors to lessen their claims in order to allow the company to run on. This typically includes the transfer of the pension scheme to the PPF, so the PPF takes over the scheme’s creditor rights.

It’s actually very good for the industry that people see the PPF every now and then just saying ‘no’

Rosalind Connor, Arc Pensions Law

Toys R Us has said it wants to continue sponsoring its scheme after the CVA. On Wednesday the company offered to shorten its recovery plan from 15 to 10 years, while paying a sum greater than its planned annual contribution of £1.6m, according to Sky News.

Talks not over

The revised offer would again fall short of the PPF’s demands, which were set out in a letter to the Work and Pensions Committee.

Pensions Expert understands that talks are still ongoing, but Toys R Us has previously said it does not have the cash to meet the PPF’s demands. Its scheme has 600 members and a £93m buyout deficit.

The £9m contribution, the letter explained, would be equivalent to three years of the company’s planned contributions and other expected costs, deemed necessary to derisk the scheme “from a failure of the CVA to turn-round the business”. Previous cases of CVAs failing to avoid insolvency include BHS.

“Given the circumstances of the CVA, other payments being made by the company (including royalties to the US parent) together with the deficit in the scheme, we believed this proposal to be reasonable,” PPF chief executive Alan Rubenstein wrote. “We’re therefore disappointed that the company could not agree to this proposal.”

A strong PPF is vital

If the PPF continues to block the deal and no CVA is agreed by Thursday’s deadline, Toys R Us could slip into insolvency, with large job losses resulting.

However, experts commended the lifeboat’s tough stance, arguing that it is in the best interest of members and also encourages corporations to respect their schemes.

“In theory the PPF does have an interest in the company continuing to trade,” said Baroness Ros Altmann, a former pensions minister.

“However, in practice the experience of BHS has highlighted the danger of companies proposing a restructuring which fails to show concern for the pension deficit, running the company on but then seeing it fail soon after, with a potentially worse deficit.”

Altmann said she was pleased to see the PPF demand more from Toys R Us: “It is important that other scheme sponsors don't see the PPF as a soft touch, which will just roll over and agree to whatever is proposed in the face of threatened insolvency.”

Rosalind Connor, a partner at Arc Pensions Law, agreed. "It’s sometimes quite hard to persuade [companies] that they really need to take the PPF seriously,” she said.

“It’s actually very good for the industry that people see the PPF every now and then just saying ‘no’.”

The Toys R Us scheme currently has a PPF deficit of about £30m, meaning that if it transfers to the lifeboat without recovering any more cash, it will impact, albeit only slightly, the PPF’s almost £8bn surplus as at July last year.

That the PPF rejected the CVA proposals could indicate that it believes an insolvency process sooner rather than later will be more productive for the scheme, and that the scheme has a claim to more than the amount offered in the sponsor’s proposal.

“The PPF will only agree to a CVA or a restructuring like that if they’re going to get more than they would through an insolvency process,” said Martin Hunter, a principal at Punter Southall Transaction Services.

Is TPR involved?

The lifeboat’s hand may also have been strengthened by Toys R Us’ recent corporate activity. Frank Field has written to its managing director Stephen Knights, who took over this year, to ask why the company wrote off £585m in loans to a related company in the British Virgin Islands.

He also queried the more than tripling of the managing director salary between 2014 and early 2016, during years when the company was making losses.

Toys R Us maintains that the loans were non-cash transactions, and that they were part of a group simplification with no impact on the health of the UK trading company.

Connor said the PPF will have assessed the regulator's potential for recourse before negotiating with the sponsor, and this may have informed its stance.

Richard Farr, managing director of covenant specialists Lincoln Pensions, said transfers between parents and subsidiaries are not unusual.

“It’s quite common – unfortunately too common – for employers of schemes to lend money upstream in times of plenty, and of course when it gets tight, they don’t get it back,” he said.

He expected that the regulator would be examining these transfers “very closely as part of any post-deal analysis”.