Recent retail woes have been well-documented. The resulting retail restructurings and administrations have also hit headlines with increasingly frequency.
We know the number of retail restructurings has spiked, but are they changing in nature, too?
It’s worth saying that the law has not changed. The Insolvency Act 1986 still stands and provides businesses with lots of flexibility to restructure their affairs.
However, it’s evident that restructurings, under the dominion of lawyers and insolvency practitioners, have sought to test the boundaries of the legislation. CVA proposals have become increasingly sophisticated, and courts have been called upon to decide whether these are valid.
Alongside this, the relationship between debtor and creditor has also evolved. Landlords, who bear the brunt of financial compromises in CVAs, are now using their collective bargaining power to achieve better outcomes and are demanding more from debtors. Landlords are also becoming more involved in the affairs of their retail tenants, with agreements leaving them intertwined long after the CVA has been voted through.
Collective bargaining
Faced with a CVA proposal from multi-site tenants, landlords are increasingly working together to elicit the best deal. Indeed, there have been a number of high-profile incidences of tactical voting in recent CVAs, the latest example being Arcadia in May this year.
Greater bargaining on the part of landlords is partly because the maths for passing a CVA has become more complex. Unlike ten years ago, when retailers assess the health of their store portfolio, stores are not simply deemed to be good or bad. Now, stores are assessed on a sliding scale. This potentially leaves landlords with multiple sites that are in different categories of profitability.
With a more complicated process comes a greater proportion of landlords that are being asked to accept compromises than before. Those landlords – many of whom will have more than one property in the larger CVAs – are increasingly consulting with other landlords in their category as to how they should vote. Whereas insolvency practitioners could previously rely on trade creditors and good landlords of ‘good’ stores to vote in favour and carry the vote, that is less often the case now.
Higher expectations
Undoubtedly, landlords are also becoming more demanding of debtors and the balance of power is shifting in their favour. More and more, creditors impacted by CVAs will expect to be offered a share of any future profits. They often demand this as a quid pro quo for accepting the CVA. This is not a new concept, but it is becoming more prevalent, particularly where the CVA is being used a precursor to a fresh injection of capital, which will only be provided upon the successful implementation of the CVA. Plus, the rising use of private equity as a source of owning and financing retailers has left creditors wanting more in exchange for their co-operation.
Landlords are also taking a view on the tenant’s business as a whole when contemplating their votes and are reacting to what they view as being under-investment or mismanagement by certain retailers. In the recent Arcadia CVA, much was made about the substantial level of dividends that had been paid out by the Group over the previous 15 years. There was much disgruntlement that it was the landlords, rather than shareholders, who were being asked to grant substantial concessions to the struggling retailer. In this case, the landlords held out for a better deal, securing an additional £9.5m for themselves. While it must be acknowledged that landlords often get the raw end of the deal, accepting substantial rental reductions, they are certainly finding their voices
Landlords becoming retailers?
The CVA process is often seen as a very adversarial one. However, in reality, CVAs involve an ongoing level of co-operation between landlords and tenants. In essence, landlords are being asked to partner with retailers by putting faith in the future viability of the business. For example, it is common to see leases with turnover or profit rents, where the level of the rent payable is determined by the trading performance of the store. The landlord shares in the upside or downside of the retailer’s performance but it is not responsible for running the business.
That is not to say that landlords could not become an integral part of the retailer. In the future, if landlords are offered an equity stake in return for a debt write-down, then it is entirely possible that such arrangements could include a requirement to give landlords a seat on the board (if they so wished). The wide scope of what a CVA can be and do means that almost anything is possible, provided the CVA is not deemed to be unfairly prejudicial to any creditor or group of creditors and the procedural requirements are met. Whether there would be an appetite from landlords to take such an active role in the management of their tenants will vary between landlords but the larger institutional investor landlords will likely be constrained by the limits imposed upon them by their prospectuses and policies on taking equity stakes in their tenants.
CVAs have undergone their own overhaul in recent years. The complex nature of modern restructurings has significantly altered the relationship between debtors and landlords. Landlords have more say, are demanding more, and are more involved in their tenants’ businesses. That said, in a brutally tough environment for high street retailers (that will only get tougher), landlords will need to continue to collaborate with their tenants in order to maintain occupancy, revenue streams and a strong tenant mix
The evolution of CVAs
Retailers are using CVAs in more creative ways. CVAs are being used at an earlier stage by businesses, although they are still often used as the only viable alternative to an administration process.
As such, they allow retailers to implement wholesale restructuring, beyond purely financial.
