Fitness First Announces CVA Proposal
Fitness First, a multi-national chain of health clubs, has proposed a company voluntary arrangement (CVA).
Where a company is experiencing difficulties in paying its debts, the directors can propose a company voluntary arrangement (CVA) whereby the company enters into a legally binding agreement with its creditors, such as their suppliers or landlords. In a similar vein to an individual voluntary arrangement (IVA), which gives an individual an alternative to bankruptcy, a CVA enables a company and its creditors to come to a compromise agreement and avoid an administration or liquidation.
A CVA can provide a company with some breathing space to allow it to reorganise or restructure its funding and/or its operations with as little disruption to the day to day trading as possible, with the control of the company usually staying within the existing management.
Richard Fleming, UK Head of Restructuring at KPMG and proposed ‘supervisor’ of the CVA, said: “The CVA proposed by Fitness First gives the company a vital life line to avoid administration, by renegotiating the lease terms of its property portfolio. In order for a CVA to be proposed, the company must be facing administration – it cannot be used simply to duck onerous leases – and the CVA must always offer a better return to creditors than an administration.
“In the case of Fitness First, we estimate the return to compromised landlords to be within a range of 23-28p in the £1 versus less than 0.5p in the £1 in administration. Importantly the CVA is part of a wider restructuring of the company, involving the transfer of the equity to the debt holders and injection of a new £100m loan facility from the lenders. The wider financial restructuring is dependent on the approval of the CVA by the creditors.
“As we have developed CVAs since the crash of 2008, we have sought to incorporate the feedback of the many landlords we have spoken to. This CVA seeks to strike a balance which allows the viable part of the business to move forward and provide a fair compromise to the landlords.”
All of the Fitness First gyms currently trading will remain open. A total of 57 gyms will be retained at current rents which will be paid monthly as opposed to quarterly for three years.
The leases of a further 18 gyms are held in other Fitness First companies on which the Fitness First CVA will have no impact. A further 5 gyms will be retained at a reduced equivalent monthly rent of 65% for 3 years before reverting to market-based rent for the remainder of the lease terms.
The company is seeking to transfer 67 gyms to other operators within the next 6 months in order to minimise the impact on landlords, other creditors and members. A marketing exercise has been undertaken resulting in interest being received for the majority of these sites. In the meantime, rent on these gyms will be reduced to 55% for 6 months, which is similar to the previous high profile CVAs KPMG has supervised in recent years.
An identical compromise is to be applied to 14 head leases of premises which have been sublet to other operators and to 8 leases of vacant sites.
The company will continue to pay rates, which is of great importance to landlords, until such time as replacement occupiers/operators are found. The CVA will contain a so-called ‘claw back’ clause which allows the compromised landlords to share in the turnaround of the business.
Brian Green, restructuring partner and second proposed supervisor of the CVA, added: “CVAs have inspired controversy in the past – understandably from the creditors who are compromised – but it is important to stress that the CVA can only take effect with the consent of 75% of creditors. The creditors will fare better in a CVA than they would do in an administration. We believe CVAs are an important tool in an insolvency practitioner’s kit and gives companies an option of last resort before the appointment of administrators, which can be more expensive and disruptive to operations, protecting more of the business and jobs.”
A detailed CVA proposal document is expected to be made available to Fitness First creditors via the company’s website today. The creditors will vote on the CVA on 20th June 2012. KPMG will spend the next three weeks in talks with creditors to ensure they understand the full detail of the proposal.
Richard Fleming and Brian Green of KPMG have also been appointed administrators of Fitness First for Women Limited, a subsidiary today. This company does not trade but holds a number of leases including 2 Fitness First gyms. Consistent with the treatment of gyms under the CVA, operations will continue as normal at those sites with a view to their transfer to alternative operators.
In 2005, BC Partners, a London-based private equity group, acquired the company.