Trading operators can create prospects from receiverships
Over the past few years, secured creditors have appointed receivers to take control of a large number of commercial properties and the trading businesses operating from these premises.
Secured creditors include banks but also loan buyers, who may have either purchased a portfolio of loans or individual loans from de-leveraging banks or other financial institutions.
With the rise of commercial properties in receivership, there has been an increase in the use of specialist business operators by receivers to manage the day to day trading of these businesses.
In circumstances, where there is a 'PropCo' (Property company) and 'OpCo' (Operating/Trading company) structure, there may be merit in the receiver continuing to trade the business by engaging a specialist operator.
This means the underlying business trading from the property may be salvaged and sold to a new purchaser. This gives the employees the chance to work with a specialist operator for a period, but ultimately with a view to continuing employment with the new owner.
In turn, continuity of trade by theOpCo should preserve and possibly enhance the underlying value of PropCo, maximising the return for the secured creditor and mitigating against any further impairments in value.
The operator model concept can be equally applicable if a receiver is appointed solely over a trading business or a property, although there are some variations to the structure of the arrangement.
The use of specialist business managers has become especially obvious in hotels, pubs, restaurants, convenience/retail stores, pharmacies, waste management and healthcare.
If a receiver is appointed over a property and a trading business, which the borrower is no longer able to trade, the receiver will generally make a decision reasonably quickly as to whether to continue to trade the business or close it.
This decision will be based on the financial performance and trading history of the business and an assessment of its future trading prospects. If it is loss-making, there is little economic sense in continuing to operate the business.
If there is merit in continuing to trade though, the receiver may then engage a specialist operator to run the day to day operations.
In selecting an operator, the receiver will look for an operator with a proven track record, sufficient capacity, excellent reporting capabilities and extensive experience in the trade of the particular business. With the high level of activity in receiverships over the past few years, we would now have an established panel of suitable operators for various industry sectors, at both a regional and national level.
The structure of the engagement with an operator will generally take the form of an operator/management agreement with a base fee per week. It may also include incentives for improving financial performance of the business and/or hitting defined performance targets.
The management agreement will define service levels and set out the responsibilities of the operator.
The management agreement may also require the operator to examine stock management and cash control, operational efficiencies, risk management practices, regulatory and compliance issues and financial key performance indicators.
The operator will report weekly or monthly to the receiver on any operational issues, key management and financial information. Some operators may also be able to avail of central purchasing power to improve the margins of the business.
Management agreements tend to run for 12 months or less to allow time for the Receiver to prepare the business for sale but also allow sufficient time to stabilise the trading and operational performance of the business.
In some cases, a longer term view may be taken and the receiver may seek to lease the premises to an operator for a period in excess of 12 months, which may involve an option to purchase for the leasee at the end of the lease/ management agreement.
While the receiver may outsource the day-to-day management of the business, he/she still needs to be cognisant of the particular legislation, regulations and risks relating to the business sector.
For example, the receiver may engage with the Pharmaceutical Society of Ireland on trading pharmacies, the HSE on healthcare businesses and the district courts on licencing for pubs and hotels.
Ultimately, the receiver aims to operationally stabilise the business pending a sale of both the business and property. Once stabilised the job moves on to preparing the business and property for sale.
In our experience, when it comes to selling the business and/or property, in a due diligence process, potential purchasers welcome the quality of trading, operational, regulatory and financial information provided by the operator/receiver.
In the absence of this type of information, we would generally find prospective purchasers will discount their price accordingly. And for investors, who may be just looking to purchase a property on a yield basis with a solid covenant, there may be an opportunity to agree terms with the interim operator to lease the premises on a longer term basis.
This also provides an opportunity for the business operator to convert short-term management agreements into longer-term agreements, to expand and develop their business.
In a successful process, it should ensure continuity of trade and employment while also protecting and possibly enhancing the value of the underlying commercial property prior to a disposal process.
Ken Tyrrell is director at PwC's restructuring and insolvency practice.