Rutland's pre-packed turkey sale of Bernard Matthews

When the chairman of an influential UK government committee accused turnaround firm Rutland Partners of “lining their own pockets” at the expense of a portfolio company pension fund, it sparked condemnation and a debate about the UK’s insolvency rules. And the controversy may cause turnaround investors to adjust their strategies when considering a “pre-pack” sale of a business.

The comments stemmed from the sale by Rutland Partners of poultry products producer Bernard Matthews via a pre-pack insolvency procedure that saw the company’s pension scheme and its £17.5 million ($22.6 million; €20.7 million) deficit pass to the UK’s Pension Protection Fund, a ‘lifeboat’ for failing UK retirement plans. While the liabilities were shed, the assets were sold for £87.5 million, with creditors – including Rutland – receiving the majority of the proceeds.

For some, the structure of the deal revealed the difficulty of reconciling competing interests when firms exit via a pre-pack. “There is a tension between achieving an acceptable return for investors where there appears to be an immediate surplus, and planning for the longer term,” says Joe Bannister, a finance practice partner at law firm Hogan Lovells.

Pre-pack sales by private equity have previously made headlines. HIG Europe’s sale of bedding retailer Silent Night and transfer of £100 million of pension liabilities to the PPF in 2011 is still being investigated, and in 2008 Duke Street Capital paid £8 million into the Focus DIY pension after its pre-pack sale.

Despite their portrayal, private equity firms are often not the drivers behind a pre-pack, and the outcome depends on the original deal structure.

“The decision to execute a pre-pack sale is the administrator’s – in the case of Bernard Matthews it was Deloitte’s decision,” a person with knowledge of the deal told Private Equity International. “And in a pre-pack the administrator’s obligation is to all stakeholders. With Bernard Matthews, Rutland’s money went in as high yielding debt behind the first charge lenders but ahead of the pension fund. So it held a certain position in the security chain, struck at the time of the deal, and that’s how it was returned.”

Rutland declined to comment.

When considering a pre-pack sale involving a deficit-plagued pension, telling regulators early is crucial. “The PPF has said it expects to be consulted very early and the earlier it is consulted the more likely it is it will be able to take part” in a restructuring, says Bannister.

In the case of Bernard Matthews, the Pensions Regulator itself analysed the original 2013 deal, knew the pension fund was subordinate to Rutland and “decided not to raise an objection or encourage the trustees to seek to prevent the transaction, which would have triggered insolvency at that point”, the watchdog said in a letter to the UK government’s Work and Pensions committee.

While scrutiny of a pre-pack sale often falls on the private equity firm, the position of creditors relative to the company is approved by management at the outset of the deal, Bannister says.

The UK government is currently holding an inquiry into the regulation of private sector defined benefit schemes, with suggestions that insolvency rules be changed to advantage the pension fund over other creditors. One European turnaround practitioner says if the rules changed in this way it would stop them doing deals. “If we were looking at a rescue deal and the pension fund had a position that ranked equal or ahead of us, we wouldn’t do it. After the Bernard Matthews case, all investors will need clarity,” he says.