Real estate, alternative real assets and other diversions

The changing face of retail

The Analyst

With so much negativity around CVAs, are they the only answer? 

Increased footfall, falling unemployment and rising wages meant that the stars should have aligned for the UK’s high street retailers in the first quarter of 2019. Yet sales remained extremely poor and any positive movement failed to offset last year’s dismal performance, when the ‘beast from the East’ left the UK’s high streets like ghost towns. According to BDO’s high street sales tracker, a mere +4.8% rise in in-store sales proved dire for retailers trying to rebound from a brutal base of -10.1% for March last year – resulting in the worst month for the high street since November 2008. 

A number of factors contribute to this decline: notably, increased competition from online retail together with over expansion and expensive estate and fit outs. In addition, all UK businesses have had to absorb several increases in employment costs and property taxes. Unforeseen external events, including Brexit and the effect on consumer confidence, have also been sighted as reasons for the decline in this sector. Retailers trying to boost sales are giving bigger discounts, yet the resulting squeeze in margins has left many of them burdened with loss-making stores. This has all contributed to the rise of Company Voluntary Arrangements (CVAs).

A CVA is a process under the Insolvency Act 1986 which enables a company to make proposals to its unsecured creditors to compromise their claims – provided 75% of those creditors, by value, vote to approve it. A company does not have to be insolvent or unable to pay its debts to propose a CVA.

The use of the procedure is popular with businesses with large leasehold estate portfolios, such as in the retail sector, as it allows the retailer to opt out of lease agreements with landlords on underperforming stores and vacate them entirely, while negotiating rent reductions of huge percentages on the rest of their estate.

The number of large retailers that launched CVAs in the UK in 2018 increased seven-fold compared to the previous year, with 13 multi-store retailers using CVAs as a restructuring method in 2018, compared to two in 2017. Household name retailers to have launched CVAs in the past year include New Look, Mothercare and Carpetright, with Philip Green’s firm, Arcadia, the latest looking to restructure in the form of a CVA.

Landlords are the group of creditors often cited as being the ones to lose out in a CVA in a business with a leasehold estate. Some landlords have expressed concern that not only do they seem to be forced to pay out for the failure of another company, with no other stakeholders sharing the pain, but they have a very limited say in whether or not it goes ahead. They are left in an unenviable position. Do they agree to reduce rents to retain their tenants, or do they run the risk that their portfolio of stores will sit empty? One group of landlords is hoping that a legal challenge they have brought, in relation to the CVA of the hair salon chain Regis UK, will, if successful, set a precedent for future retail restructurings.

With so much negativity around CVAs, are they the only answer? How successful CVAs really are has become the topic of debate over more recent months, where analysis has shown that many companies have subsequently fallen into administration. CVAs are attractive for a number of reasons, the primary one being that the control of the company remains with the directors. A CVA is also generally less expensive and disruptive to a business than an administration and has less impact on value and liquidity.

For a CVA to be successful the ingredients are simple: an underlying viable business, a committed management team and a deliverable, robust, funded business plan. A number of CVAs have failed because of overly optimistic business plans and not being able to raise funding following approval. The plan should not all be about cutting cost. It should demonstrate how operational efficiencies will be delivered and how this will have a positive impact on the business. In addition, having the right team with the appropriate skills and who are properly incentivised is key to delivering a successful CVA.






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