Regulators in UK are increasingly getting worried over the trend of PE investors forcing companies into administration to get around pension liabilities. The issue has come under the scanner after the Pension Protection Fund (PPF) and The Pensions Regulator found that European private equity fund HIG Capital exploiting a legal loophole after the acquisition of UK bed-maker Silentnight.
Both the regulators are now concerned that investors will follow the trend of acquiring struggling companies and try to go around the legal provision of “moral hazard”, which allows them block corporate restructuring and shed pension liabilities. This is possible because senior debt holders of a heavily indebted company can lawfully call in the administrators to extract significant concessions from unsecured creditors. More often than not the pensions scheme turns out to be the largest unsecured creditor.
A similar deal took place in April when Sun European Partners, another PE firm bought the senior secured debt of colour magazine publisher Polestar. It then arranged for additional funding for the struggling company and offered to pay the pensions trustee of Polestar £45 million over 12 months against the £500 million of pension liabilities. The trustees accepted the deal, otherwise Sun would have forced the business into liquidation.
In case of Silentnight, HIG called in the administrators after PPF – which typically insures underfunded pension schemes, refused to accept an offer to pay the scheme 6p in the pound, while it agreed to settle other trade creditors at 65p. The PPF guarantees 70 percent of employee’s benefits and makes up the difference if the scheme has insufficient funding.
“We are investigating the situation – it is early days, so we are not sure yet what action we are going to take”, said a spokesperson of PPF.
HIG claims that by buying the senior debts of the insolvent company, it has saved 1,200 jobs.