Employer covenant review of a leading engineering services provider undergoing a major restructuring
An Employer undergoing financial stress
Employer annual income – c. £42.7m
Scheme assets – c. £15.4m
Deficit recovery period – c. 8 years
Situation
Adverse trading performance due to Covid-19, had resulted in financial distress for the Employer, a bank imposed Independent Business Review and an urgent need to restructure the business and its future banking facilities (including a new CBILS).
The Employer was proposing a two-year deficit repair contribution holiday and the Scheme Trustees were principally concerned about the underlying covenant and the Scheme’s relative position in comparison to other creditors as part of the proposed restructuring.
Approach
We evaluated the Employer’s forecasts and considered its ability to service deficit repair contributions in both the short and medium-term in the context of the proposed restructuring.
We appraised the mitigation and asset realisation strategies being undertaken by the Employer with the support of the bank and the likely impact and risks to unsecured creditors, including the Scheme.
We appraised a variety of alternative options for the Trustees, including the protection of potential upside opportunities.
Impact
We concluded that deficit repair contributions in excess of that initially proposed by the Employer to be affordable.
Our findings allowed the Trustees to actively engage with the Employer and enter into robust negotiations to ultimately agree on a more favourable deficit repayment plan with secured upside opportunities.
We also recommended a number of conditions precedent, including a negative pledge, additional guarantees, and a quarterly reporting framework to monitor ongoing covenant strength.
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