The Guinness World Records website contains a Frequently Asked Questions section to guide would be World Record applicants on the essential features of a good World Record. For example, a good World Record will be measurable, breakable, worldwide rather than localised or regional, verifiable and universal. In addition, a good World Record concentrates on one variable only. So, for example, Guinness World Records can verify the largest painting but would not consider the largest painting by the most people. The addition of a second variable infringes the policies which govern what makes a Guinness World Record.
Similarly, a shareholder approaching multiple possible purchasers of a business which sponsors a UK defined benefit pension scheme will look to achieve the simplest and most straightforward scenario with regard to the scheme to present to potential buyers. To this end, the sponsor may seek to negotiate a Memorandum of Understanding (MoU) with the scheme trustees which simplifies the information provision aspects of the engagement with potential buyers.
One specific provision which frequently appears in an MoU is a single variable employer covenant assessment based on just one of the numerous variables which normally surround the trustee assessment of the sponsor’s covenant. A covenant assessment will normally span such criteria as the sponsor’s current financial resources, prospective financial performance – especially cash-flows, medium and long term outlook, the impact upon the sponsor covenant of its wider group, the sponsor’s liquid financial resources, the affordability of deficit repair contributions to the scheme, sponsor capital structure, capital intensity, working capital, financial commitments and contingent liabilities. With an MoU the sponsor’s aim will be to hone down the assessment to a single variable. An example of a frequently sought single variable covenant assessment will be one based upon the borrowing or gearing of the sponsor measured in multiples of EBITDA (earnings before interest, tax, depreciation and amortisation) at the point at which a transaction goes live.
Given the potential for such an arrangement to become overly burdensome upon trustees, typically an MoU will be subject to detailed negotiation and, depending upon the facts of each case, mitigation before trustees will be willing to reach agreement.
The reward for the sponsor should be a controlled engagement process with potential buyers in which like for like comparisons can be made between rival offers for the business. This should have a knock on benefit to the trustees who have an interest in the smooth running of the process because it is more likely to result in the best buyer becoming the preferred bidder at an early stage.
The Guinness World Record site guide concludes by stating that, as a good rule of thumb, if you can’t measure it, weigh it or count it, then it is probably not a record. Similarly, potential buyers will need to be able to measure a scheme deficit, weigh it up and count the consequences for their interest in bidding for the business. A good MoU can go some way towards achieving that goal by adopting a single variable covenant assessment approach.
This blog post was written by Patrick Kennedy. For further information, please contact:
Patrick Kennedy, partner, Pensions
T: 0161 836 7788
[The author is responsible for the establishment of the currently vacant Guinness World Record title of “Fastest Marathon playing a Mandolin”.]