American Greetings Corporation’s acquisition of Clinton Cards Plc’s senior secured debt, followed by the acquisition of a number of its stores and other assets by way of a credit bid, is the largest UK transaction to date involving a supplier buying the debt and assets of a customer with the intention of keeping it in business.
American Greetings Corporation's acquisition of Clinton Cards Plc's senior secured debt, followed by the acquisition of a number of its stores and other assets by way of a credit bid, is the largest UK transaction to date involving a supplier buying the debt and assets of a customer with the intention of keeping it in business. Credit bids and loan-to-own strategies, a US import, have traditionally been the domain of private equity buyers, which tend to buy the debt of a struggling company at a discount with a view to taking it over and selling it on (see box "Credit bids and loan-to-own").
The deal may also, in the retail sector at least, lead distressed companies to look carefully at whether a company voluntary arrangement (CVA) is their best option.
As was reported widely in the financial press, Clinton Cards Plc, the UK's largest specialist retailer of greetings cards and related products, had found itself in financial difficulties due to challenging trading conditions, increased competition for greeting cards (in particular, via the internet and in supermarkets), and a significant rent bill for its 750-odd stores.
American Greetings is one of Clinton Cards' key suppliers, and describes itself as a "creator and manufacturer of innovative social expression products that assist consumers in enhancing their relationships to create happiness, laughter and love". It has a number of greeting card lines together with related paper products. American Greetings was concerned about the future of its unsecured debt (approximately £15.5 million), given that Clinton Cards had been defaulting on its payments obligations under its supply arrangements, and due to the general state of its business.
On 9 May 2012, American Greetings announced that it had acquired approximately £35 million of Clinton Cards' senior secured debt from Barclays and Royal Bank of Scotland via its UK subsidiary, Lakeshore Lending Limited. Later that day, Clinton Cards was placed into administration (paragraph 14, Schedule B1, Insolvency Act 1986) (1986 Act) (see box "Administration").
During the statutory moratorium, the administrators conducted an auction of the 397 most viable stores (together with other assets, including the Clinton Cards and related brands). There were a number of potential bidders, but American Greetings was successful in its bid. The bid took the form of a credit bid, which meant that the purchase price was paid out of approximately £23 million of the senior secured debt held by American Greetings. The remaining £12 million will be met (if there are sufficient proceeds) out of the insolvency process (namely, the closure of the remaining 350-odd stores). The acquisition was announced on 9 July 2012.
Although credit bids are common in the US, they are less so here, and there was criticism that American Greetings' strategy was somewhat aggressive, particularly if, as was reported at the time, American Greetings did not support a proposal for a CVA.
CVAs have proved increasingly popular in these situations as they avoid the need for a company to be placed into administration. They provide a consensual solution via a contract between a company and its unsecured creditors in settlement of the company's outstanding debt (Part I, 1986 Act). For example, JJB Sports has successfully used CVAs to restructure its business on two occasions (see feature article "Restructuring listed companies: pointers for the premium-listed (www.practicallaw.com/5-519-6216)", this issue).
However, American Greetings had made clear at the time of its debt acquisition that it was keen for Clinton Cards to continue trading, and that its status as a senior creditor would allow it to work closely with the administrators and identify the best solution for Clinton Cards. Its subsequent purchase of the best performing stores at a sensible price with a view to keeping the business going would seem to have put paid to that criticism. If American Greetings had not stepped in, the assets might have dwindled over time, or been bought by a competitor (which would presumably relegate the brand).
This does not, of course, mean that there will be a flood of distressed retailers finding white knights in the form of their suppliers: here, the constituent elements of a distressed business, a tradeable debt at a sensible price, and a willing and prepared buyer, all worked to create the "perfect storm".
Joanna Morris, PLC.
Partners at Zolfo Cooper LLP were appointed joint administrators over Clinton Cards Plc and its subsidiaries. Freshfields Bruckhaus Deringer LLP advises the administrators.
In the US, credit bidding is the right of a secured creditor to offset, or bid, its secured allowed claim against the purchase price in a sale of its collateral under section 363(b) of the Bankruptcy Code. In effect, a secured creditor can treat its secured claim as if it were cash and reduce the purchase price of the secured assets on a dollar-for-dollar basis by the amount of the claim. By credit bidding its claim in this manner, it is possible for a secured creditor to purchase assets without paying any actual cash for them.
Hedge funds, private equity firms, other distressed debt investors and strategic buyers commonly use credit bidding as a loan-to-own strategy to take ownership of all or some of a bankrupt company's assets. Loan-to-own strategies involve providing or purchasing the troubled company's senior secured debt, with the ultimate goal of acquiring the company.
(For further information, see PLC US practice note "Credit Bidding in Section 363 Bankruptcy Sales", www.practicallaw.com/7-500-4339, and PLC Cross-border article "Loan-to-own: coming to Europe?", www.practicallaw.com/2-500-7203.)
Administration is a procedure which allows for the reorganisation of a (usually insolvent) company or the realisation of its assets under the protection of a statutory moratorium that prevents creditors from enforcing their claims against the company.
When a company enters administration, an insolvency practitioner is appointed as the company's administrator. The administrator takes over the control of the company's business and assets from the company's directors in order to achieve one of the statutory purposes of administration (for more information, see PLC Restructuring and insolvency practice note "Administration", www.practicallaw.com/3-107-3975).