Going concern uncertainty, viability statement, period shortened because of uncertainty on going concern

Johnston Press plc – Annual repot – 30 December 217

Industry: publishing

CORPORATE GOVERNANCE (extract – page 45)

Liquidity and going concern

As at 30 December 2017, the Group had net debt of £195.9 million (excluding mark-to-market accounting adjustment), comprising cash of £25 million and borrowings of £220 million. The borrowings comprise £220 million of high yield bonds (the Bonds), which are repayable on 1 June 2019 and are not subject to any financial maintenance covenants.

On 29 March 2017, the Group announced it had commenced a Strategic Review, working with its advisers Rothschild and Ashurst LLP, to assess the financing options open to the Group in relation to the Bonds. As a key part of this Strategic Review process, the Board has engaged with its major stakeholders, including shareholders, holders of the Bonds, Pension Trustees and the Pensions Regulator.

On 10 October 2017, the Board announced that it was approaching its largest bondholders regarding the formation of an ad hoc committee of bondholders (the ‘Bondholder Committee’) to consider in greater detail certain potential amendments to the Group’s capital structure. On 2 November 2017, the Group confirmed that the Bondholder Committee had been formed. The main objectives of these potential amendments to the Group’s capital structure, combined with certain proposed amendments to the Group’s pension scheme, are to (i) achieve a sustainable level of debt within the Group to enable it to refinance its debt in the future, and (ii) materially reduce or eliminate the pension scheme deficit by 2021, whilst preserving the pension scheme members’ benefits. On 1 February 2018, the date of our last trading update, the Board confirmed that discussions with advisers to the Bondholder Committee were in progress.

The Group continues to explore these potential amendments to its capital structure with advisers to the Bondholder Committee and the Board is satisfied with the continued support of the Group’s major stakeholders during the review process. Any proposal that results from these discussions will remain subject to negotiation and the consent of relevant stakeholders, and there can be no certainty that a formal proposal will be forthcoming. In the event that consensual amendments to the Group’s capital structure cannot be agreed with relevant stakeholders, alternative options for the restructuring or refinancing of the Bonds prior to their maturity in June 2019 will be explored as part of the ongoing Strategic Review process.

The Group has performed a review of its financial resources taking into account, inter alia, the cash currently available to the Group, the absence of financial maintenance covenants in the Bonds, and the Group’s cash flow projections for the thirteen month period from the date of this report to 1 June 2019, and, based on this review, and after considering reasonably possible trading downside sensitivities and uncertainties, the Board is of the opinion that, subject to the material uncertainty surrounding the repayment of the Bonds on 1 June 2019 (referred to below), the Group has adequate financial resources to meet its operational cash flow requirements for the next thirteen months from the date of this report. The directors also anticipate that the Group will remain in a position to meet its obligations in respect of the Bonds, including with regard to the payment of interest, in the period prior to their maturity.

However, given the challenges faced by the newspaper and printing industry as a whole, the current trading experience of the Group, and the likely financial position of the Group at the time the Bonds are due for repayment in June 2019, there is material uncertainty surrounding the Group’s ability to refinance the Bonds at par in the market on commercially acceptable terms. Failure to repay, refinance, satisfy or otherwise retire the Bonds at their maturity would give rise to a default under the indenture governing the Bonds dated 16 May 2014, and this possibility indicates a material uncertainty that may cast significant doubt on the Group’s ability to continue as a going concern and if the Strategic Review does not deliver a solution for the Group it may be unable to realise its assets and discharge its liabilities in the normal course of business.

Notwithstanding this material uncertainty, taking into account that (i) the Strategic Review is ongoing, (ii) the Group has adequate financial resources to meet its operational cash flow requirements for the thirteen month period from the date of this report, and (iii) the Group is, and is anticipated to remain, in a position to meet its obligations in respect of the Bonds in the period prior to their maturity, the Directors have concluded it is appropriate to prepare the financial statements on a going concern basis.

Viability Statement

Provision C.2.2. of the Corporate Governance Code requires directors to assess the prospects of a business over a period of time longer than the 12 months typically required to determine the going concern basis for the preparation of the financial statements of a business. The directors have previously determined that the period of three years from the balance sheet date is appropriate for the purposes of conducting this review. This period was selected with reference to the Group’s strategy and planning cycle. The Board formally reviews strategy twice a year, normally in May and September, with a view to informing the subsequent annual budget setting. The budget forms year one of the three year plan, with projections for years two and three. A three year plan for the Group covering the period 2018 to 2020 was considered by the board initially in September 2017 and, subsequently, in April 2018.

In light of the ongoing Strategic Review to assess the financing options open to the Group in relation to the Bonds, the directors have reconsidered the period over which they can reasonably assess the Group’s viability. As noted in the review of Liquidity and Going Concern on page 45, there is a material uncertainty surrounding the Group’s ability to refinance the Bonds, which are repayable in full on 1 June 2019 and are not subject to any financial maintenance covenants, at par in the market on commercially acceptable terms. Failure to repay, refinance, satisfy or otherwise retire the Bonds at their maturity would give rise to a default under the indenture governing the bonds dated 16 May 2014, and this possibility indicates a material uncertainty that may cast significant doubt on the Group’s ability to continue as a going concern and if the Strategic Review does not deliver a solution for the Group it may be unable to realise its assets and discharge its liabilities in the normal course of business.

Given that it is not currently possible to determine the Group’s capital structure beyond June 2019 (which will determine, inter alia, the term, cost, financial maintenance covenants (if any) and quantum of any borrowings, and the level of contributions to the pension scheme), it is not possible for the Board to comment on the Group’s ability to continue in operation and meet its liabilities as they fall due beyond June 2019 and the directors have therefore concluded that it is necessary to shorten the viability assessment period to the thirteen month period from the date of this report to 1 June 2019, in line with the period of the going concern review on page 45. On this basis, and acknowledging the material uncertainty around the repayment, refinancing, satisfaction or other retirement of the Bonds in June 2019, the Board confirms that it has a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period to 1 June 2019.

Whilst it is not possible for the Board to comment on its ability to continue in operation and meet its liabilities as they fall due beyond June 2019, as noted above, the Group has continued to produce a three year plan for the Group for the period covering 2018 to 2020 as part of the Group’s normal strategic planning cycle on the assumption that the Group can secure an appropriate restructuring or refinancing of the Bonds on, or before, 1 June 2019.

In setting the annual budget and three year plan for 2018 to 2020 the Board considered the current trading position and the principal operating and financial risks and opportunities identified by the Group. In particular:

  • The opportunity to invest and grow its audiences and its digital revenue streams;
  • The ability of the Group to continue to reduce costs, to mitigate the continuing decline in print-based circulation and advertising revenues; and
  • The level of capital expenditure required to support investment in growth, and the level of restructuring costs needed to support further cost reduction initiatives.

In reviewing its three year plan, the Group conducted sensitivity analysis to understand the impact of the combination of a reduction in digital advertising growth rates, an additional decline in other revenue streams and shortfalls in cost savings. As a result of these sensitivities the business would be cash consumptive, before taking mitigating actions. The Board has identified a number of mitigating actions that could be taken, if necessary, in order to preserve the Group’s liquidity, including reductions in capex, restructuring and property disposals. In the three year plan the Group has assumed that there would be no reduction in interest payments and pension contributions post June 2019. The future assessments and plans adopted by the Board are subject to change and a level of market uncertainty. As a result of the risks and uncertainties faced by the business (including those outlined in the Principal Risks & Uncertainties section on pages 20 to 21) the outcomes reflected in its plan cannot be guaranteed.

The Group’s trading performance in 2017 reflected continuing declines in local print advertising and newspaper sales, being only partially offset by a substantial improvement in the performance of the i newspaper (driven by both National print advertising and print circulation revenues), strengthening digital revenue (excluding classifieds) and cost savings.

The three year plan for 2018 to 2020 demonstrates that, with no reduction in financing costs and pension contributions (refer to the financial review on page 23), the operations remain profitable and cash generative. Whilst declines in local print advertising and local newspaper sales revenue are expected to continue over this period, further strong growth in both the profitability of the i newspaper brand and digital revenue (excluding classifieds) is expected to continue which, along with additional cost savings, should help maintain profitability.

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF JOHNSTON PRESS PLC (extract)

Material uncertainty relating to going concern

We draw attention to page 45 in the financial statements, which highlights that there is material uncertainty surrounding the Group’s ability to refinance the Bonds at par in the market on commercially acceptable terms in June 2019 when they are due to be repaid. Management has set out that failure to repay, refinance, satisfy or otherwise retire the bonds at their maturity would give rise to a default under the indenture governing the bonds dated 16 May 2014 and could have a material impact on the Group’s ability to continue as a going concern.

On 29 March 2017, the Group announced it had commenced a strategic review, working with its advisers, to assess the financing options open to the Group in relation to the Bonds. As a key part of this strategic review process, the Board has engaged with its major stakeholders. Various options are currently being considered, as explained in more detail of page 81 in the financial statements.

As stated in Note 1, these events or conditions, along with the other matters as set forth in Note 1 to the financial statements, indicate that a material uncertainty exists that may cast significant doubt on the company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.

In response to this we:

  • Engaged in regular discussions with the directors on the strategic review and the consideration of potential options;
  • Assessed the design and implementation of the controls in place to address this key audit matter;
  • Challenged the appropriateness of management’s forecasts such as checking the mechanical accuracy, assessing historical forecasting, performing sensitivity analysis and challenging the assumptions applied in management’s forecasts;
  • Considered the consistency of management’s forecasts with other financial modelling such as the impairment models and the forecasting underlying the viability statement;
  • Reviewed the terms of the bond to ensure consistency with the information disclosed; and
  • Reviewed the wording of the going concern statement, including the material uncertainty, and assessed its consistency with management’s forecasts.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (extract page 81)

Going concern

As at 30 December 2017, the Group had net debt of £195.9 million (excluding mark-to-market accounting adjustment), comprising cash of £25 million and borrowings of £220 million. The borrowings comprise £220 million of high yield bonds (the Bonds), which are repayable on 1 June 2019 and are not subject to any financial maintenance covenants.

On 29 March 2017, the Group announced it had commenced a Strategic Review, working with its advisers Rothschild and Ashurst LLP, to assess the financing options open to the Group in relation to the Bonds. As a key part of this Strategic Review process, the Board has engaged with its major stakeholders, including shareholders, holders of the Bonds, Pension Trustees and the Pensions Regulator.

On 10 October 2017, the Board announced that it was approaching its largest bondholders regarding the formation of an ad hoc committee of bondholders (the ‘Bondholder Committee’) to consider in greater detail certain potential amendments to the Group’s capital structure. On 2 November 2017, the Group confirmed that the Bondholder Committee had been formed. The main objectives of these potential amendments to the Group’s capital structure, combined with certain proposed amendments to the Group’s pension scheme, are to (i) achieve a sustainable level of debt within the Group to enable it to refinance its debt in the future, and (ii) materially reduce or eliminate the pension scheme deficit by 2021, whilst preserving the pension scheme members’ benefits. On 1 February 2018, the date of our last trading update, the Board confirmed that discussions with advisers to the Bondholder Committee were in progress.

The Group continues to explore these potential amendments to its capital structure with advisers to the Bondholder Committee and the Board is satisfied with the continued support of the Group’s major stakeholders during the review process. Any proposal that results from these discussions will remain subject to negotiation and the consent of relevant stakeholders, and there can be no certainty that a formal proposal will be forthcoming. In the event that consensual amendments to the Group’s capital structure cannot be agreed with relevant stakeholders, alternative options for the restructuring or refinancing of the Bonds prior to their maturity in June 2019 will be explored as part of the ongoing strategic review process.

The Group has performed a review of its financial resources taking into account, inter alia, the cash currently available to the Group, the absence of financial maintenance covenants in the Bonds, and the Group’s cash flow projections for the thirteen month period from the date of this report to 1 June 2019, and, based on this review, and after considering reasonably possible trading downside sensitivities and uncertainties, the Board is of the opinion that, subject to the material uncertainty surrounding the repayment of the Bonds on 1 June 2019 (referred to below), the Group has adequate financial resources to meet its operational cash flow requirements for the next thirteen months from the date of this report. The Directors also anticipate that the Group will remain in a position to meet its obligations in respect of the Bonds, including with regard to the payment of interest, in the period prior to their maturity.

However, given the challenges faced by the newspaper and printing industry as a whole, the current trading experience of the Group, and the likely financial position of the Group at the time the Bonds are due for repayment in June 2019, there is material uncertainty surrounding the Group’s ability to refinance the Bonds at par in the market on commercially acceptable terms. Failure to repay, refinance, satisfy or otherwise retire the Bonds at their maturity would give rise to a default under the indenture governing the Bonds dated 16 May 2014, and this possibility indicates a material uncertainty that may cast significant doubt on the Group’s ability to continue as a going concern and if the Strategic Review does not deliver a solution for the Group it may be unable to realise its assets and discharge its liabilities in the normal course of business.

Notwithstanding this material uncertainty, taking into account that (i) the Strategic Review is ongoing, (ii) the Group has adequate financial resources to meet its operational cash flow requirements for the thirteen month period from the date of this report, and (iii) the Group is, and is anticipated to remain, in a position to meet its obligations in respect of the Bonds in the period prior to their maturity, the Directors have concluded it is appropriate to prepare the financial statements on a going concern basis.

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