Employer covenant review of a complex engineering and contracting group
An Employer disposing of a major asset
Employer annual income – c. £36.4m
Scheme assets – c. £22.8m
Deficit recovery period – c. 12 years
Situation
In seeking to address succession planning challenges and having previously divested certain non-core business interests, the Employer proposed selling a profitable division via an MBO.
The Scheme Trustees were concerned regarding the impact of this corporate disposal on the underlying employer covenant, including the level of compensation offered to the Scheme and the ability of the remaining group to service future deficit repair contributions.
Approach
Given the divesting division represented a significant contributor to the profit and cash generation of the Employer, we evaluated the underlying impact of the asset sale on the covenant.
We appraised the valuation of the MBO consideration, the proposed contribution to the Scheme, and other future associated income flows related to the transaction.
We considered the impact of the proposed sale on the underlying asset base of the Employer and its ability to continue to service future contributions to the Scheme.
Impact
Our findings allowed the Trustees to actively engage with the Employer and to negotiate and ultimately secure an attractive lump-sum payment for the benefit of the Scheme.
We concluded increased deficit repair contributions were considered to be affordable by the Employer, which could further help reduce the length of the current recovery plan.
We highlighted ongoing succession planning issues facing the Employer and the potential impact this could have on the future strength of the covenant.
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