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Caffè Nero: An uncertain road ahead

Another major high street chain is on the brink due to the continued impact of Covid-19, with Caffè Nero launching a restructure. Stuart Evans from BLM Law analyses the coffee shop’s options, and the restructure and insolvency measures available to businesses on the line.

18th Nov 2020
Partner BLM Law
Columnist
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Caffe Nero
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Caffè Nero has been “decimated” by the Covid-19 pandemic this year. Having sought a voluntary agreement with creditors, how will the coffee chain fare as the pandemic lockdown measures pushes other high street brands to the brink? And what lessons can other struggling businesses learn from this sorry scenario?

Is Covid-19 the sole reason for Caffè Nero’s troubles?

Whilst other struggling chains, such as Pizza Express, had been grappling with debt long before the pandemic began to batter trading levels, by all accounts Caffè Nero appeared to have been performing well prior to Covid-19. Before lockdown, I would regularly drop in for a coffee at the store on the ground floor of my office building, which was always busy.

The company has stated that whilst it was able to get through the first lockdown, the second lockdown is proving much harder to navigate. In a statement, they explained that the shift to home working, "limits to social interaction and a sustained reduction to footfall in city centres" is also making it difficult for the chain to forecast how long it will be impacted for. As such, the company appointed KPMG to oversee a restructure.

How is it planning to restructure, and how will its creditors be affected?

KPMG has devised a Company Voluntary Arrangement (CVA) for Caffè Nero’s 660 UK and 200 overseas sites. This type of insolvency procedure will allow the chain to continue to trade, whilst it negotiates revised terms with creditors, including landlords. It isn’t the first high street chain to enter a CVA as a result of the pandemic, with YO! and Pizza Express amongst some of the brands pursuing this option.

However, not all CVA proposals are approved, so it will be interesting to see whether Caffè Nero’s landlords agree to these revised terms. It will likely outline a compromise on creditor claims and new terms for trading arrangements, and Caffè Nero will need the vote of 75% in value of all creditors in order to progress this.

The chain’s creditors will be faced with a complex decision: to take no action and agree to the new terms in the hope that the CVA succeeds and the chain can pay off the agreed dividend, or to reject the new terms and receive a lower sum if the company ultimately enters administration or liquidation. The latter may be the outcome in any event if the CVA fails; many do. The current Covid environment makes business forecasting even more complex.

So far, there are reports that the chain has informed some of its landlords that it does not expect to pay rent for three years, whilst landlords of sites that are performing better – at least when compared to other sites – will receive rent based on turnover for the next three years. Since the pandemic began to batter UK businesses back in March, there’s been a lot of discussion over the tug-of-war between businesses in distress, creditors and landlords; we have seen the Government pass legislation to now ban evictions until after Christmas. There has also been a ban on statutory demands, with most winding up petitions until the end of the year in an attempt to prevent formal creditor action and a spike in insolvencies.

Concerns from landlords have therefore persisted, and the implication of Caffè Nero’s upfront announcement is significant. In seeking to keep a tenant’s business afloat, will the landlord topple instead? We may well see other similarly struggling businesses follow suit, by seeking a temporary but lengthy pause on commercial rent payments.

What are the options?

With increased restrictions still in place and the prospect of future lockdowns on the cards, it seems sadly inevitable that some companies – especially those who rely on customer footfall – may seek similar measures to Caffè Nero, if there is a viable business.

When advising businesses in distress, there are a number of options that could offer a lifeline. If insolvency measures are necessary, CVA is one option, along with administration (which may include survival as a growing concern or the sale of the business). There’s also the option of a CVA and combined statutory moratorium, to prevent creditor action whilst a CVA is devised. If the business cannot be saved, then an orderly liquidation can be progressed.

Some breathing space is available. The temporary measures enacted under the Corporate Insolvency and Government Act 2020 remain in place until the end of the year. For those unfamiliar, the Act included a temporary ban on statutory demands and the progression of most winding up petitions and prohibited termination clauses that would otherwise be triggered on insolvency.

Given the recent extension to the original Job Retention Scheme, it’s very possible the Government will be considering an extension or adaption of these measures as we enter 2021. Both essentially buy businesses a little more time as they navigate the pandemic, and the uncertainty it continues to cause.

So, whilst there may be space for a review of the current state of a business and what it may look like in the short to medium term, if a business is concerned about its cash position, creditor pressure, balance sheet or solvency, seeking advice quickly and early is imperative to finding a viable option for survival and recovery.

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By AndrewV12
19th Nov 2020 10:19

No, I dont like buying high street coffee and tea, the tea is disgusting and the coffee drinks are full of sweeteners, I prefer to make my own, nothing to do with the article but there you go :).

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