Three strikes and out – Should there be a limit on repeat CVA’s?
The first launched in April 2018 which saw 2,000 positions secured across the business and a 75% reduction in rents.
The second, which had been in place since June 2019, was terminated on 8th May following a failure to pay the reduced rents.
A third CVA has been proposed but this has been too much for the British Property Federation (BPF), the trade association for UK real estate describing the action as “deplorable”.
The BPF says that the proposal doesn’t specify the duration of the CVA required to save the business, provides Select with new rights to break leases early that have benefited from rental discounts and restricts property owners’ rights to break leases – preventing owners from being able to find new tenants.
Additionally, Select has proposed to pay no rent at all for the 49 stores affected by the CVA.
BPF Chief Executive Melanie Leech said “This is Select’s third CVA in as many years, with the second one terminating early when they failed to meet the obligations of the proposal.
“It’s deplorable that the business is now again attempting to exploit the CVA process by proposing to pay no rent for many of its stores and, in giving little indication of how long the CVA will actually last, failing to produce a credible rescue plan.
“To suggest that the business should be given new rights to break leases on stores that have benefited from rental discounts is outrageous. This is opportunistic and simply asking property owners to absorb significant losses with no commitment that this investment will be worthwhile.”
They aren’t the only high street name looking at further CVAs.
New Look are reportedly looking at a new CVA which would ask landlords of more than 450 of their stores to accept new lease contracts as part of the deal that would ensure the rent was based on the turnover of each store.
This would be the first time that a major high street retailer had sought blanket lease contracts for all their outlets and many would be taking a keen interest to see how it would work in practice.
George Macdonald, Executive Editor of Retail Week, has even asked a question that would have been unthinkable even 12 months ago – Should there be a cap on CVAs for retailers?
He said: “Retailers have made use of CVAs for years now in attempts to make new starts, typically relieved of the heavy weight of property costs. But the repeated need to deploy an insolvency process shows that it’s the business itself, rather than the environment in which it operates, which is the bigger problem.
“Companies seeking to stage further CVAs just a year after their previous one cannot expect to be taken seriously because nothing has changed that led them to failure in the first place, other than money that they owe others, has changed.
“Why should a landlord grant them further concessions and undermine their own hard-pressed businesses? Better to find a new tenant or purpose for the premises rather than taking a haircut, especially when the likelihood is that the retailer may find itself in a similar predicament another year down the line – or sooner.”
Chris Horner, Insolvency Director with Business Rescue Expert, thinks that we shouldn’t think about throwing the baby out with the bathwater.
“A CVA is just one of the tools available to an insolvency practitioner looking to sell and save a distressed business but like any tool, if used incorrectly, it can cause damage.
“There’s been a rise in their use particularly in retail and hospitality recently, before Covid-19 and I can see more being used throughout this and next year as they provide a vital breathing space and opportunity to properly market and sell businesses or those parts of them that are otherwise viable and profitable.
“This preserves jobs and generally brings a better return for creditors than administration or liquidation.
“Some landlords might be down on CVAs recently and might suspect the motives of companies proposing them but we find that the more open and transparent our communication with landlords and creditors is, especially early in the process, the more supportive they are as they have a better understanding of the situation and don’t think they’re being taken advantage of.”
An example of a CVA process adapting well when circumstances change for the worse can be found with Warrens Bakery.
A CVA was agreed in December 2019 with creditors which saw it close 22 of its 66 stores and a production facility to help renegotiate the repayment of its debts rather than looking to liquidate the business.
Suppliers and landlords voted overwhelmingly in favour of the CVA citing the company’s growth strategy, financial forecasts and existing good long-term relationships.
As Covid-19 significantly impacted the business and its recovery, they have reduced their minimum CVA payments to allow it to survive as well as increasing its banking loan facilities and taking advantage of rental holidays and other reliefs.
Warrens Chairman Mark Sullivan said the landlords and creditors had been fully supportive.
In the right circumstances a CVA is the perfect solution for a business to emerge from administration in better shape than it entered it.
It can be viable and successful because of the CVA process allowing it to restructure, not despite it.
If a business enters multiple CVAs then the chances are there are more underlying problems with the company itself than the process. Even if circumstances continue to deteriorate, a CVA will allow a business with strong fundamentals to adapt it with creditors approval and goodwill so both parties can eventually benefit.
Contact us if you think that your business needs some breathing space to work out where it can go next.
We’ll arrange a free, initial consultation with one of our expert advisors to identify your immediate priorities and options
We can then work together to create a rapid and realistic rescue plan that could see the company’s road to recovery begin immediately.