CVA not a magic bul­let but of­fers the best prospect of sav­ing a busi­ness

The Sunday Telegraph - Money & Business - - Business - RICHARD FLEM­ING

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

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