Insolvencies on the up
I have been reading lots recently about how there will be more insolvencies as a result of the increasing macro headwinds that companies are facing.
Trustees of pension schemes which are sponsored by companies that are showing signs of distress will be very alert to the impact on the pension scheme and to the regulatory position.
blogged about this last month and set out six key considerations when approaching a refinancing (even a “simple” one):
But what of more routine refinancing? Trustees (and scheme sponsors) ought to carefully examine “standard” business transactions as well. David Fairs at TPR
The cost of debt:
Changes in the cost of borrowing to the employer (e.g. changing interest rates and rises in lenders’ fees) may affect cash flow and, in turn, the employer’s ability to meets its pension obligations.
The overall structure of the employer’s debt may impose different financial stresses on the employer.
Employers may wish to borrow against their assets in order to achieve better prices or larger facilities. In a large group cross guarantees can expose a UK employer to group-wide banking debt. Trustees ought to consider whether this may put the lender ahead of the pension scheme in an insolvency recovery situation. We frequently advise Trustees on precisely this scenario and in one case have recently negotiated contingent asset support to be provided from the employer’s parent as mitigation.
these are early warning signs which, if breached, allow a lender to take steps to protect their position (e.g. renegotiate the debt terms and security coverage, charge additional fees or, ultimately, calling in their debt). Again, Trustees should understand the impact of such agreements on the Scheme’s position.
the lender may request the employer enters into a promise not to do X,Y or Z. Trustees should understand such covenants as they may restrict the employer’s ability to agree funding etc.
Particular attention should be paid when considering debt from a new lender. The terms of the borrowing (such as those above) may well change and the trustees’ role as a key stakeholder may be impacted.
These developments reflect a growing need for professional advice, not only in distress scenarios but also on “business-as-usual” corporate activity such as a refinancing. The same point applies to lenders as well.
TPR stresses the need for transparent information sharing between employers and trustees. Knowing the amount of debt is not enough for pension trustees – they need to understand the terms of the finance and intercreditor arrangements (and how it differs from the current finance arrangement) as well. TPR says that employers “should be prepared to share relevant information with trustees, including financing documents”.
Another related reason why trustees and sponsoring employers, and indeed all parties involved with a refinancing – including banks – should take careful note of TPR’s guidance is the scope of TPR’s anti-avoidance powers and criminal sanctions which were expanded by the Pension Schemes Act 2021.
TPR and the DWP have sought to reassure the industry that the expanded powers are not intended to interfere with legitimate, routine business activity, such as a normal refinancing… but nevertheless parties are likely to want to consider the regulatory position. Having regard to TPR’s published expectations is likely to help establish the various defences and to help demonstrate reasonable behaviour. To understand more about TPR’s powers, the key defences and practical steps to consider, readers may request access to Burges Salmon’s free interactive triage tool here.
Emily Scaife, Partner in Burges Salmon’s Banking and Finance team, says:
"We regularly advise lenders, borrowers and trustees on all types of financing and restructuring transactions. As a result of recent changes to pensions legislation, we are increasingly encouraging our lender clients to keep in mind the regulatory framework when lending to a Group that has a defined pension scheme. We work closely with our Pensions team to assist our clients with a joined up service."