Toys R Us is close to winning crucial support from the pensions lifeboat to avert the threat of the retailer crashing into administration with more than 3,000 job losses just days before Christmas.
Sky News has learnt that Britain's biggest toys retailer and the Pension Protection Fund (PPF) made "significant" progress during overnight talks ahead of a crucial creditor vote due to take place on Thursday.
An outline deal to secure the PPF's support is said to have been agreed, comprising a ten-year commitment to wiping out Toys R Us UK's pension deficit, some additional funds and a number of other commitments from the company which give the PPF security over company assets.
The overall package is expected to include a sum greater than the £9m originally sought by the PPF, but less than half of it would be in the form of an up-front cash contribution.
The remainder would be in the form of security or guarantees over other Toys R Us UK assets over an unknown period as well as other elements, according to sources.
Details of the prospective agreement were still being thrashed out on Thursday morning, and it remained possible that the ongoing talks could still collapse ahead of the creditors' vote.
Toys R Us initially tabled a compromise deal aimed at securing the PPF's backing for a so-called Company Voluntary Arrangement (CVA) on Tuesday.
The rescue plan, which needs the support of 75% of creditors, would involve closing a quarter of Toys R Us's UK stores, and steep reductions in the rent bills at many others.
At least 500 jobs will also be lost.
The PPF's support is critical because it holds more than 20% of the creditor votes.
It had demanded a £9m up-front contribution to the scheme – which would be equivalent to three years of company payments and associated levies and said it would vote against the CVA because it failed to offer adequate support for the toy retailer's retirement scheme.
Alvarez & Marsal, which is advising on the CVA, had been put on stand-by to handle an administration.
The crisis follows Sky News' revelation that the PPF would not support the CVA without the £9m pension fund injection.
Malcolm Weir, the PPF's director of restructuring and insolvency, confirmed on Tuesday that the PPF had signalled its opposition to the CVA but kept alive the possibility of a U-turn.
Toys R Us UK's pension scheme has a PPF deficit of £30m, referring to the sum that would be required to bring the level of benefits up to those which would also be payable by the PPF – which takes on responsibility for paying the pensions of bankrupt companies with defined benefit pension schemes.
On a full buyout basis, the deficit is £93m, according to a letter from Alan Rubenstein, the PPF's chief executive, to Frank Field, the Labour MP who chairs the Work and Pensions Select Committee.
"We would hope that there is no hasty entry of the company into administration or liquidation if the CVA proposals are rejected – the company made clear that they believed that the CVA would mean 'no disruption for customers shopping through the Christmas and New Year period'," he wrote.
Sources said this week that there was no prospect of an up-front sum as large as £9m sum being injected into the scheme while Toys R Us's US parent was in formal bankruptcy protection proceedings.
One insider said 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 CVA.
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."
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.
That track record has caused alarm among PPF executives evaluating the Toys R Us proposals.
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.
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There has also been controversy over payments to UK executives and the write-off of a big loan owed to the UK company.
Toys R Us and the PPF both declined to comment.
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