The pensions lifeboat is demanding a £9m payment into Toys R Us’s UK pension scheme to win its backing for a restructuring that would trigger the closure of dozens of British shops.
Sky News has learnt that the Pension Protection Fund (PPF) and the scheme’s trustees want the sum – equivalent to four years of employers’ contributions, along with related levy payments – to be agreed within 24 hours.
The demand could determine the future of Toys R Us in Britain, with the deadline for a vote on a company voluntary arrangement (CVA) – a legally binding agreement which enables the restructuring of finances and operations – looming on Tuesday.
Under the CVA plan, at least 26 of the chain’s shops will close, with landlords agreeing to substantial rent reductions at many of the remaining outlets, saving millions of pounds a year.
However, without the PPF’s support, the CVA is likely to fail at a meeting of creditors on Thursday, which could cast into doubt the viability of the toy retailer’s loss-making UK business.
At least 500 jobs would face the axe if the CVA is voted through, but a failure to do so could cast doubt on the future of the remaining 2,700 staff at the company.
The £9m up-front contribution is being demanded by the PPF amid concerns that the scheme could run into trouble again in several years’ time.
Image: The demand could determine the future of Toys R Us in the UK
Malcolm Weir, the PPF’s director of restructuring and insolvency, told Sky News on Monday: “We continue to work closely with the trustees of the Toys R Us pension scheme and externally appointed advisors given the current CVA proposals.
“We have yet to decide how the creditor rights will be exercised in the CVA vote.
“We are seeking to fully understand the current position of the company, including its future potential, position of the US parent and the reported historic financial transactions.
“The pension scheme is already underfunded and, if we were to vote in favour of the CVA, we would need actions taken that ensure the position of the pension scheme was not going to further weaken.”The filing of CVA proposals means that an assessment period is automatically triggered for a pension scheme.
“Whatever the outcome of the CVA the pension scheme members can be reassured that they remain protected.”
The CVA proposal is being overseen by Alvarez & Marsal, which declined to comment.
One insider said, though, that the PPF was seeking to elevate itself above every other Toys R Us creditor, despite the fact that it was landlords – rather than the pension scheme – facing financial pain as a result of the proposal.
They added that the trustees had suggested waiving royalty payments made by the UK chain to its financially troubled US parent, which amount to roughly £8m annually.
However, they described this suggestion as a “red herring”.
Concerns about the Toys R Us pension scheme have already been raised by Frank Field, the Labour MP who chairs the Commons Work and Pensions Select Committee, following the waiving of a loan worth more than £580m to a holding company in the British Virgin Islands.
In a letter to Mr Field published on Monday, the trustees insisted that the CVA would “not compromise the scheme” and said the loan write-off “had no impact on the direct covenant provided to the scheme”.
The veteran MP expressed alarm, however, saying: “As with BHS, the trustees and pensions regulator were kept entirely in the dark.
“The pension scheme is, at best, an inconvenient afterthought to self-interested corporate restructure.
“The puny regulatory system only kicks in once the damage is done.”
The restructuring of Toys R Us’s UK business requires the approval of a 75% majority of the company’s creditors, with a further vote requiring no more than 50% of creditors who are not directly connected to the business to oppose it.
Under the CVA plan, the affected Toys R Us shops will remain trading throughout the Christmas period and well into the new year, but will begin closing from next spring.
The chain’s larger out-of-town stores will be disproportionately affected by the closure plan, owing to their weak performance amid a fast-changing outlook for the high street.
Retailers including BHS, Focus DIY and JJB Sports have previously used CVAs to exit loss-making stores, although all three companies ultimately succumbed to the fast-changing retail environment.
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The effort to overhaul its UK estate follows the filing by Toys ‘R’ Us’s American parent for Chapter 11 bankruptcy protection in September.
That move has sparked controversy over the company’s move to pay up to $21m in bonuses to top executives, which it claims is necessary to motivate them during the critical Christmas trading season.