CVA not a magic bullet but offers the best prospect of saving a business
With the collapse of onceprosperous store chains now almost a weekly occurrence, 2018 is already shaping up to be an unforgiving year for the country’s bricks and mortar retailers.
The situation out on the British high street – always sensitive to the weather – has been aptly described as a perfect storm and restructuring specialists are being kept busy salvaging as much as possible from the wreckage.
It’s a storm whipped up by a unique stack of challenges: rising fixed costs, mounting consumer debt, shrinking consumer confidence, labour supply issues resulting from Brexit and the well-documented shift in consumer behaviour towards online and mobile.
For some retailers, these problems have been exacerbated by difficulties servicing debt – a knife-edge situation, where even a company that is trading reasonably well can be brought down by loan repayments.
When a retailer gets into serious trouble, one of the most popular (or, perhaps, least unpopular) tools is the much-maligned Company Voluntary Arrangement. A CVA is an insolvency process, where the business can compromise its unsecured creditor claims. In practice, this allows businesses to reduce their physical footprint and secure rental reductions.
It is not a panacea for struggling retailers – it’s a life raft for businesses that are holed beneath the waterline and can only be considered when the alternative is administration. Nor is it, contrary to popular opinion, a “back door” for healthy retailers to dispose of their worst-performing stores.
The CVA is particularly well suited to retailers which have expanded too rapidly and in the wrong places. But they can be applied to any struggling business, where shrinking the footprint or reducing rents could be part of a solution.
Whilst a CVA could hardly be described as good news for those involved, most stakeholders prefer them to administration as more value is preserved.
For shareholders, CVA promotes the survival of the legal entity, so there is the potential to reinvest and reboot the business. Management teams prefer them as they retain control of the business, rather than having to hand it over to administrators, and the process is much less disruptive.
Suppliers and employers prefer CVAS – suppliers get paid in full in most retail CVAS and employees have more certainty over their jobs.
Even landlords tend to prefer them. A CVA provides a landlord with a window of opportunity to find another occupier, a period when they know the rates and insurance will be paid.
A CVA is not a magic bullet – having too much space and paying too much rent are far from being the only, or even the main, reasons that retailers find themselves in trouble.
Right-sizing the store portfolio can’t fix failures of business strategy, stock control or management. It can’t help beat the competition or come up with a better online customer experience. Nor does it address other major financial issues, most notably debt, which is often at least as important.
A retailer undergoing a CVA is pulling up a bar stool in the last chance saloon. To stand a prospect of getting out of the place intact will require not only a smarter geographical presence, but also a good management team with a decent turnaround plan and the ability to execute it, for one. Access to additional capital or debt, for another. And finally, there is frequently a need for proper and prompt financial restructuring, to stop debt repayments capsizing the ship when many of the holes have been plugged.
Even then there are no guarantees that the process will work – a CVA can, indeed often does, prefigure the ultimate failure of the business. But in the case of most distressed retailers it is the least-worst option, because it offers the best prospect of saving a business, the jobs and economic value embodied within it.
Richard Fleming is head of European restructuring at global professional services firm Alvarez & Marsal