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Just how voluntary are Company Voluntary Arrangements and who really wins?

1st Jul 2019
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Do creditors have any choice but to accept the avalanche of High Street store Company Voluntary Arrangements? And are CVAs simply postponing the inevitable for many retailers, while damaging many pension and investment schemes?

David Jinks, head of consumer research at e-commerce home delivery specialist ParcelHero, argues CVAs are a devil’s bargain and a multichannel approach to retail sales is a far better long-term fix.

There’s no doubt the fashion chain Monsoon is facing stormy weather. According to the FT’s forecasts, it’s heading for a £2.3m loss for 2019. It’s also little surprise that the chain has joined the long list of well-known High Street names that have sought to strike a Company Voluntary Arrangement with its business creditors.

Initially, Monsoon’s main aim is to reduce its huge rents burden. It’s proposing cuts of up to 65% in the rents it pays on some stores. Monsoon, however, is merely at the tip of a huge CVA iceberg, and many such arrangements include wholesale closures of High Street stores.

Nearly 1,000 stores have closed under CVA agreements in the past two years alone. Just this month Philip Green’s Arcadia Group has also agreed on a CVA which includes the closure of at least 23 UK stores. It was so unpopular with a number of creditors it took two goes to get a deal through.

So, does that mean Arcadia – which includes well-known brands such as which includes Topshop, Burtons, Dorothy Perkins and Topman – has ‘won’ and its reluctant creditors ‘lost?’ And who else stands to lose in the snowballing High Street CVA rush?

A Company Voluntary Arrangement is implemented by an insolvency practitioner. A meeting of creditors is held to see if they will accept the terms of the arrangement; as long as 75% (by debt value) of the creditors agree then the CVA is accepted.

This ties in all creditors, even if they voted against the deal or did not vote. Not only do creditor landlords have to accept rate cuts and store closures, but creditors are also usually unable to take further legal actions as long as the terms are adhered to, and any existing legal action is suspended.

So a 75% agreement level must mean it’s the creditors, such as the commercial property landlords, who actually win? Why else would such a large majority be in favour? Well no, in reality, it’s something of a devil’s bargain.

The landlords continue to receive a portion of the previous rents, with the promise of a return to better rates at the end of the agreed CVA term. Faced between that and nothing, it’s not hard to see why many creditors agree to keep going. It’s a Faustian pact.

It's harder to see why some even agree to cancel rent entirely on some stores, which is what has happened in some agreements. There are two reasons this could be the case: firstly, CVAs are voted on not just by landlords but by other creditors who aren’t impacted by rent cuts or cancellations.

And secondly, landlords of the affected properties can give the retailer 60 days’ notice to vacate zero rent stores as soon as the CVA takes effect. But if they did so, they could see “dilapidations” reduced by 85%.

Dilapidations in this case not meaning that the building has fallen into a ruinous state, but the repairs required during or at the end of a tenancy or lease! The costs, paid by the outgoing tenant, of restoring premises to their original condition, can be significant and it may be worth the landlord sticking it out for the length of the arrangement.

Under the terms of their CVAs, Debenhams is axing 22 stores and House of Fraser 31 stores; while Carpetright has already used its CVA to ditch around 92 stores, Mothercare 50 and Homebase 92. Not only is the trust between landlords and retailers being destroyed; but many pension and investment funds are tied up in these properties. Institutional investors such as pension funds and insurance companies are large investors – both directly and indirectly – in commercial property markets.

Landlords represent pension funds and investment funds. The ordinary man in the street’s money is invested in these funds. So when rents aren’t paid, that affects the performance of these funds. That means it’s not only landlords who suffer, or shoppers seeing the closure of their local stores. It means everyone pays the price of a CVA. Typically, large pension schemes may typically have around 8% of their funds invested in commercial property developments and management.

Many of us may also have our pension pot invested in a specialist property pension fund. As an example, the makeup of one well-known fund includes 9.2% invested in shopping centres and around 9.5% in standard retail and stores and other commercial properties. And Britain’s High Street banks have around 8% of their loans tied to commercial properties.

So not only are the landlords and High Street shoppers losing but so are most of us with a pension plan.

Are retailers the only winners?

Does all this mean the only winners in a CVA are the retailers? CVAs were first introduced as part of the Insolvency Act 1986 but were slow to gain ‘popularity’. One of the first notable companies to adopt a CVA was Focus DIY in 2009, and in the same year, JJB Sport secured a CVA with its creditors.

It looked like they were a way to avoid voluntary administration and enable directors to keep their jobs. BHS could be said to have really started the current CVA "trend" in 2016, forcing its creditors into accepting far lower rents and even rent ‘holidays’ for some stores. Likewise, Jamie’s Italian also negotiated a CVA with its creditors in February this year.

So are these companies all winners? Well, no. Walk into your local shopping centre or High Street and you will find they have all disappeared. Not even a favourable CVA was enough to save these once highly regarded brands. That’s because CVAs don’t remedy the fundamental faults at the heart of a brand. They are at best a band-aid on what may be a terminal wound.

So, if closing stores wholesale, and creating massive underinvestment in the commercial property sector, is not the answer, what is? 

Shoppers have not disappeared. They have simply moved some of their purchasing online. Today e-commerce grabs around 20% of the total retail spend. But most of us still enjoy a stroll around our town centre stores. Retailers with a portfolio of stores should seek to make the most of these great assets, ensuring store events are an "event", and introducing in-store services such as hairdressing or personal shoppers in department stores.

The key is adopting a multichannel approach to retail; with customers buying online and popping into their local stores to pick up items and return them. The increased footfall encouraged by BOPUS – Buy Online, Pick Up in Store – will result in increased sales for many of our, still much-loved, town centre stores.

Combine this with ensuring staff are knowledgeable and enthusiastic, and better customer experience than simply looking at images online, and stores can still be a valuable asset rather than an albatross around chains’ necks.

Add to the mix a reduction of Britain’s commercial property rates – ours are now the highest in Europe – and the endless cycle of CVAs may be bought to an end. Voluntarily.

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