Insolvency tool or the latest business fashion accessory? Why CVAs are so hot right now
Pleased with yourself for being a talent spotter and slightly smug that you can spot a diamond months or years before everybody jumps on the bandwagon?
Or jealous that when you talk about them now you feel almost contractually obliged to drop your superior knowledge and might even utter the key phrase “I liked them first!”
This blog is about something similar that we’re experiencing at the moment. No, not that The 1975 and Cattle and Cane are finally getting their due; but that simply everybody is an expert on CVAs and their proper use now.
The humble CVA or Company Voluntary Arrangement has seemingly never been more popular with retailers or financial writers as The Arcadia Group followed Debenhams into a CVA agreement with their creditors.
For good reason as we’ve written previously, it protects them from creditors’ demands, buys them time to avoid liquidation and restructure the company. It also crucially reduces outgoings such as rent.
The CVA surge, nearly 20% of all CVA’s are now retail companies, coincides with the steep decline of the traditional high street or out of town shopping mall retail model in the face of online ordering.
It’s no magic bullet however. Since 2017, nearly 1,000 stores belonging to retailers that entered into CVAs had closed their doors in the UK, including big names like Carpetright, Mothercare and Homebase. During this same period the number of retailers entering CVAs were up 52%.
Paul Souber, co-head of retail with Colliers Property International, a Real Estate services company, who produced the research said: “CVAs should not be used as a tool for financial engineering and a way to walk away from freely entered-into legal contracts. Their use must only be as a last resort.”
The Arcadia affair has brought the intended or actual purpose of CVAs into sharp focus.
It took Arcadia two attempts to pass their CVA after it failed to secure the required 75% backing from landlords to implement the arrangement.
A CVA has traditionally been an insolvency tool, used only if a business is in real danger of liquidation and closure. Arcadia Chairman Sir Philip Green caused consternation amongst critics when he denied that the group was close to collapse in interviews after winning the vote.
Now this could be typical bullish bluster but it also speaks to the heart of the increased use of the framework for liability reduction purposes. It’s controversial because while it meets the letter of the law, it certainly doesn’t meet the spirit.
Intu, one of the biggest of Arcadia’s landlords, opposed the CVA and said it was unfair to their full-paying tenants.
Next are certainly paying attention to the trend and are asking for specific CVA clauses to be inserted into their rental agreements stipulating that if any neighbouring retailers get their rents reduced via a CVA then they would automatically be eligible for the same reduction for their units.
While it would be difficult for a landlord to agree to their proposal, the rationale is understandable. They say landlords are “effectively subsidising retailers who enter CVAs to the detriment of others.”
“A CVA clause levels the playing field and keeps it level going forward should the circumstances of surrounding retailers change over time”.
Needless to say, landlords are resisting the attempt. Ian Fletcher of the British Property Federation exploded: “Next’s request illustrates how far the CVA process is at risk of being misunderstood or misused. It’s nonsense to suggest that a process designed to try and keep a sinking ship afloat should be applied to healthy businesses.
“Also, where does this end? A CVA often allows a business to cut what it pays in business rates or renegotiate the terms agreed by its banks. Will Next also seek these concessions?
“Ultimately, requests like the one by Next undermine the CVA process, which was set up to ensure businesses facing insolvency have a chance of survival and don’t disappear from our high streets.”
Although it’s hard not to feel sympathy for Next and other successful retailers who suddenly see their excellent sales strategies and initiatives rewarded by their rivals’ liabilities being reduced across the board.
There’s also the tacit implication that large retailers can use the threats of store closures, job losses and empty shop units to blackmail landlords into agreeing the terms of a CVA even if the retailer could trade on without entering one.
So what’s the solution?
We explore the alternatives in part two tomorrow.