Koninklijke Ahold Delhaize N.V. – Annual report – 31 December 2019
35 Commitments and contingencies (extract)
Contingent liabilities (extract)
Guarantees Guarantees to third parties issued by Ahold Delhaize can be summarized as follows:
The amounts included in the table above are the maximum undiscounted amounts the Group could be forced to settle under the arrangement for the full guaranteed amount, if that amount is claimed by the counterparty to the guarantee. For lease guarantees, this is based on the committed lease terms as communicated to Ahold Delhaize. Specifics to the guarantees are discussed below.
Ahold Delhaize may be contingently liable for leases that have been assigned and / or transferred to third parties in connection with facility closings and disposals. Ahold Delhaize could be required to assume the financial obligations under these leases if any of the third parties are unable to fulfill their lease obligations. The lease guarantees are based on the nominal value of future minimum lease payments of the relevant leases, which extend through 2041 and are based on the committed lease terms as communicated to Ahold Delhaize. The amounts of the lease guarantees exclude the cost of common area maintenance and real estate taxes; such amounts may vary in time, per region and per property. Certain amounts related to these leases are recognized as a provision or a financial liability; for more information see Notes 23 and 25.
Lease guarantees related to divestments
As of December 29, 2019, the €833 million in the undiscounted lease guarantees as presented in the table above completely relates to divestments. Of this amount, €342 million relates to the various Tops divestments, €127 million to the BI-LO / Bruno’s divestment, €109 million to the Sweetbay, Harveys, and Reid’s divestment, €105 million to the Bottom Dollar Food divestment and €150 million to other, including the divestment of remedy stores in the U.S. and the divestment of Bradlees.
On a discounted basis, these lease guarantees amount to €674 million and €742 million as of December 29, 2019, and December 30, 2018, respectively. If Ahold Delhaize is called upon to satisfy its obligations under the outstanding lease guarantees, it has several options to reduce the Company’s gross exposure. Further details on the guarantees related to divestments are discussed below.
Lease guarantees related to the Tops Markets divestments
In connection with the divestment of Tops Markets in 2007, Ahold Delhaize retained a contingent liability for 45 leases that carry Ahold Delhaize guarantees. Additionally, Ahold Delhaize retained liabilities related to stores previously divested, including guarantees on five Tops stores in eastern New York state, as well as liabilities related to the Tops convenience stores and the stores in northeast Ohio as outlined under Lease guarantees related to the divestment of Tops convenience stores: Wilson Farms and Sugarcreek.
On February 21, 2018, Tops Markets filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. These actions resulted in Ahold Delhaize recognizing €24 million partly as a financial liability and partly as an onerous contract provision (see Notes 23 and 25), which was presented as an after-tax loss from discontinued operations of €17 million in 2018.
Lease guarantees related to the divestment of Tops convenience stores: Wilson Farms and Sugarcreek
Tops may be contingently liable to landlords under 186 leases assigned in connection with the divestment of the Tops’ Wilson Farms and Sugarcreek convenience stores in 2005, in the event of a future default by the tenant under such leases. In addition, Ahold Delhaize may be contingently liable to landlords under the guarantees of 77 of these leases in the same event.
Lease guarantees related to divestment of the Tops northeast Ohio stores
Prior to Ahold Delhaize’s divestment of Tops in 2007, Tops closed all of its locations in northeast Ohio before year-end 2006. As of December 29, 2019, 32 of the total 55 closed locations in northeast Ohio have been divested or are now subleased or partially subleased. An additional 19 leases have been terminated. Four stores continue to be marketed. Ahold Delhaize may be contingently liable to landlords under guarantees of 13 of these leases in the event of a future default by the tenant under the leases.
Lease guarantees related to BI-LO / Bruno’s divestment
In 2005, Ahold Delhaize divested its U.S. retail subsidiaries BI-LO and Bruno’s. On February 5, 2009, and March 23, 2009, Bruno’s Supermarkets, LLC and BI-LO, LLC, respectively, filed for protection under Chapter 11 of the U.S. Bankruptcy Code (the “2009 BI-LO Bankruptcy Filing”). As a result of the 2009 BI-LO Bankruptcy Filing, Ahold Delhaize made an assessment of its potential obligations under existing lease guarantees. Consequently, in 2009, Ahold Delhaize recognized provisions of €109 million (see Note 25) and related tax benefit offsets of €47 million within results on divestments.
During the 2009 BI-LO bankruptcy, BI-LO rejected a total of 16 leases that were guaranteed by Ahold Delhaize and Ahold Delhaize took assignment of 12 other BI-LO leases with Ahold Delhaize guarantees. On May 12, 2010, the then reorganized BI-LO (“BI-LO II”) exited bankruptcy protection and BI-LO II assumed 149 operating locations that were guaranteed by Ahold Delhaize. Based on the foregoing developments, Ahold Delhaize recognized a reduction of €23 million in its provision, after tax, within results on divestments in the first half of 2010. Since the end of the second quarter of 2010, Ahold Delhaize has entered into settlements with a number of landlords relating to leases of former BI-LO or Bruno’s stores that were guaranteed by Ahold Delhaize.
On March 27, 2018, BI-LO II and its parent, Southeastern Grocers, Inc., filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code (the “2018 BI-LO Bankruptcy Filing”). As a result of the 2018 BI-LO Bankruptcy Filing, Ahold Delhaize has reassessed its potential obligations under the lease guarantees based upon: (i) the remaining initial term of each lease, (ii) an assessment of the possibility that Ahold Delhaize would have to pay under a guarantee and (iii) any potential remedies that Ahold Delhaize may have to limit future lease payments.
At the end of 2019, the undiscounted lease guarantees relating to BI-LO and Bruno’s totaled €127 million. As of December 29, 2019, the remaining provision was €2 million (December 30, 2018 restated: €2 million) with a related tax benefit offset of €1 million (2018 restated: €1 million); see Note 25. This amount represents Ahold Delhaize’s best estimate of the discounted aggregate amount of the remaining lease obligations and associated charges, net of known mitigation offsets, which could result in cash outflows for Ahold Delhaize under the various lease guarantees. Ahold Delhaize continues to monitor any developments and pursues its mitigation efforts with respect to these potential lease guarantee liabilities.
Lease guarantees related to Sweetbay, Harveys and Reid’s and Bottom Dollar Food divestments
Ahold Delhaize divested its U.S. retail subsidiaries Sweetbay, Harveys and Reid’s to BI-LO II in 2014 and its U.S. retail subsidiary Bottom Dollar Food to Aldi in 2015. Ahold Delhaize had provided guarantees for a number of existing lease contracts, which extend through 2037. Ahold Delhaize has made an assessment of its potential obligations under lease guarantees, considering: (i) the remaining term of each lease, (ii) the re-let potential of the property if the acquirer were to default on the lease and (iii) the credit position of the counterparty. At the end of 2019, the undiscounted lease guarantees were €109 million for Sweetbay, Harveys and Reid’s and €105 million for Bottom Dollar Food. As of December 29, 2019, the on-balance sheet financial liability representing the fair value of the lease guarantees was €10 million (2018: €12 million); see Note 23.
In connection with the 2018 BI-LO Bankruptcy filing described above, BI-LO II has rejected a number of leases for which Ahold Delhaize recognized a provision for lease guarantees in the amount of €22 million in 2018. As of December 29, 2019, the remaining provision for these lease guarantees was €11 million (2018: €15 million); see Note 25.
Lease guarantees related to the divestment of U.S. remedy stores
In July 2016, as a condition of receiving regulatory clearance for their merger from the United States Federal Trade Commission (“FTC”), Ahold and Delhaize entered into a consent agreement (“Consent Agreement”) with the FTC that required Ahold and Delhaize to divest certain stores in seven states in order to prevent the merger from being anti-competitive. Ahold Delhaize subsidiaries may be contingently liable for 73 divested locations.
Lease guarantees related to the divestment of Bradlees
In 1992, Stop & Shop spun-off Bradlees Stores, Inc. (“Bradlees”) as a public company (the “Bradlees Spin-off”). In connection with the Bradlees Spin-off, Stop & Shop assigned to Bradlees certain commercial real property leases. Pursuant to a 1995 reorganization of Bradlees and a subsequent wind-down and liquidation of Bradlees following a bankruptcy protection filing in 2000 (collectively, the “Bradlees Bankruptcies”), a number of such real property leases were assumed and assigned to third parties. Pursuant to applicable law, Stop & Shop may be contingently liable, subject to applicable defenses, to landlords under certain of the leases assigned in connection with the Bradlees Spin-off and subsequently assumed and assigned to third parties in connection with the Bradlees Bankruptcies.
Lease guarantees backed up by letters of credit
As part of the divestment of U.S. Foodservice in 2007, Ahold Delhaize received an irrevocable standby letter of credit for $216 million (€163 million), which was reduced to $37 million (€33 million) as of December 29, 2019 (2018: $46 million (€40 million)).
Corporate and buyback guarantees
Ahold Delhaize has provided corporate guarantees to certain suppliers of its franchisees or nonconsolidated entities. Ahold Delhaize would be required to perform under the guarantee if the franchisee or non-consolidated entity failed to meet its financial obligations, as described in the guarantee. Buyback guarantees relate to Ahold Delhaize’s commitment to repurchase stores or inventory from certain franchisees at predetermined prices. The buyback guarantees reflect the maximum committed repurchase value under the guarantees. The last of the corporate and buyback guarantees expire in 2022.
Indemnifications as part of divestments of Ahold Delhaize’s operations
In the relevant sales agreements, Ahold Delhaize has provided customary indemnifications, including for potential breach of representations and warranties, that often include, but are not limited to, completeness of books and records, title to assets, schedule of material contracts and arrangements, litigation, permits, labor matters, and employee benefits and taxes. These representations and warranties will generally terminate, depending on their specific features, a number of years after the date of the relevant transaction completion date.
The most significant divestments of operations are, to the extent not already covered in the guarantee section above, described below. In addition, specific, limited indemnifications exist for a number of Ahold Delhaize’s smaller divestments. The aggregate impact of claims, if any, under such indemnification provisions is not expected to be material.
As part of the divestment of Disco S.A. (“Disco”) in 2004, Ahold Delhaize is required to indemnify Disco and its buyers for the outcome of the Uruguayan litigation described in the Legal proceedings section of this Note. Ahold Delhaize’s indemnification obligation relating to this litigation is not capped at a certain amount nor restricted to a certain time period.
Tom & Co divestment
In 2016, Ahold Delhaize divested the pet specialist shop chain Tom & Co. As part of the transaction, Ahold Delhaize granted indemnities to the purchaser of all divested stores, which Ahold Delhaize believes are customary for transactions of this nature.
Because Ahold Delhaize operates in a number of countries, its income is subject to taxation in differing jurisdictions and at differing tax rates. Significant judgment is required in determining the consolidated income tax position. We seek to organize our affairs in a sustainable manner, taking into account the applicable regulations of the jurisdictions in which we operate. As a result of Ahold Delhaize’s multi-jurisdictional operations, it is exposed to a number of different tax risks including, but not limited to, changes in tax laws or interpretations of such tax laws. The authorities in the jurisdictions where Ahold Delhaize operates may review the Company’s tax returns and may disagree with the positions taken in those returns. While the ultimate outcome of such reviews is not certain, Ahold Delhaize has considered the merits of its filing positions in its overall evaluation of potential tax liabilities and believes it has adequate liabilities recorded in its consolidated financial statements for exposures on these matters. Based on its evaluation of the potential tax liabilities and the merits of Ahold Delhaize’s filing positions, it is unlikely that potential tax exposures over and above the amounts currently recorded as liabilities in its consolidated financial statements will be material to its financial condition or future results of operations.