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Scratching around to find something cheerful to say to match the festive season has been harder this year than most, but it came through last night with confirmation that administrators had been appointed at Whittard of Chelsea, the High Street specialist supplier of teas, and at an associated business that deals in flavoured coffees.
What turned this seeming financial disaster into a good news story was that the administrators, Ernst & Young, had organised what is known as a "pre-pack", or pre-packaged deal in which the business was immediately restructured and sold on to a new owner so that it will continue trading.
Customers should notice very little difference, at least in the near term, and nor should the employees, who will keep their jobs. The pain is felt by Icelandic investment firm Baugur, which bought Whittard three years ago, and likewise most probably any holders of junior debt.
The way pre-packs work is interesting, but ironically they are at their most effective, and most likely to succeed, when the company concerned is in seriously dire straits. Typically, this happens with a business that has been bought by private equity and loaded up with debt to an extent that may possibly have made sense before the credit crunch but which is quite impossible for the company to bear now. There is, however, a good trading business operating underneath which could have a future if it had the right mix of equity and debt for current conditions.
Pre-packs are a way from getting swiftly from A to B with a minimum of damage to the operating business. But they cannot often be used. The difficulty with insolvencies these days is that debt structures are far more complicated than they used to be. In the old days, there would probably have been a few banks in the frame as principal lenders, but now it is as likely that the original lending banks will have sold their debt on to someone else, and there will be all sorts of different kinds of debt of different levels of seniority.
In a private-equity-owned business, there may also be some of the exotic stuff such as second-lien loans, payment in kind notes or bullet loans (don't ask). The holders of this may in some cases be the original lenders but are as likely to be funds specialising in distressed debt - and they bring a much more brutal approach to a negotiation than lending banks used to.
A bank that lent at 100p in the pound will be anxious to recover as much of that as possible, and may be reluctant to settle for less than 60p in the pound. But a distressed debt holder who bought in the secondary market at 30p may be quite happy with a reconstruction that gives him 40p. Different lenders have conflicting objectives and quite different thresholds of pain.
Indeed, it may be more difficult still to find a way through the debt maze because some distressed funds may hold several different classes of debt, which means that the company seeking to renegotiate its lending does not always even know who is sitting opposite - or which hat they are wearing. Given that debt restructuring invariably means some classes of debt holder suffering more than others, this can be particularly difficult.
The key to a successful pre-pack, therefore, is when the company is in such difficulties that only the most senior lender has any chance of getting any money back.
According to Mark Hyde, a restructuring specialist with law firm Clifford Chance, pre-packs are most likely to succeed when the equity is deemed to be worthless and the losses are of sufficient scale additionally to wipe out the junior debt holders so that there is only one person left standing - and he is wounded: the holder of the senior debt.
It then becomes a negotiation between the senior lender and the new owner, with the lender having to decide how much of a haircut - a write-off - he is prepared to make in order to attract an injection of new equity sufficient to recapitalise the business.
All this happens before the company goes into administration. But once the deal is struck and the administrator is appointed, all the existing debt and equity arrangements fall away and the administrator is left in a position to do the deal on the pre-packaged terms.
The encouraging part of this story is its reminder that the appointment of administrators does not necessarily mean the end of a business. This thought is worth holding on to in the coming months when there are likely to be a great many more such appointments. Indeed, the whole point of the change in insolvency law 20 years ago that created the administrator's role was to help businesses survive wherever possible.
Unfortunately, the bad news is that, even with this procedure, British bankruptcy laws are still loaded against the company and the sheer fact is that the declaration of insolvency is an excuse to revoke all contracts militates against survival.
Without embracing the legal excess of Chapter 11, there is perhaps something here we could learn from the United States.
