Retail CVAs – are they a triumph of hope over reality?

failed CVA? boarded up shopsMothercare has reported today that it is “in a perilous financial position”.

It seems that rarely a week goes by on the High Street when yet another retailer or restaurant chain announces that it is seeking to restructure its business by entering into a CVA (Company Voluntary Agreement) with creditors.

With footfall on the High Street plummeting, by 6% in March and 3.3% in April, while rents have continued to rise, trading conditions are continuing to be challenging, to put it mildly.

The inexorable shift to online shopping can account for some of this, but there are still retailers that have weathered the storm by developing more agile business models, often by combining online and in-store shopping, by making it easy to “click and collect” or by providing a great in-store experience.

Among the retailers that have announced that they will use a CVA as part of a restructure alongside divesting themselves of under-performing stores and food chains have been BHS, Toys R Us, Byrons, New Look, Prezzo, Select, Carpetright, House of Frazer and now Mothercare.

What are the attractions of a CVA?

Although the CVA is an insolvency process, unlike all the others it can be used to save companies. The others involve the eventual closure of the company.

A CVA requires the support of a majority of creditors who are offered better prospects for being paid than the alternative of closing down the company.

This is likely to be welcomed by a business’ employees who keep their jobs and those landlords and suppliers who keep a customer.

Restructuring provides the chance for a business to raise further capital and also the opportunity to renegotiate onerous contracts, such as leases to agree rent reductions.  From the landlords’ point of view a CVA means they can continue to receive some rent instead of being left with empty buildings for which they will need to find new tenants in a declining market.

From the viewpoint of the struggling business, it offers scope for reorganising the business to address the underlying issues that caused the problems and put it on a more sustainable footing, although they may need the help of a restructuring and turnaround adviser.

Despite the attractions and approval of a CVA, many businesses subsequently fail due to a lack of fundamental change to the organisation and business model as all too often the CVA is simply used for financial restructuring to write down debts and get rid of onerous obligations. It is rarely used as an opportunity to turn around the business.

Key to a successful CVA is the underlying business model

Toys R Us and BHS are perhaps the most high-profile examples of CVAs that failed. Both initially entered into CVAs but shortly after had to admit defeat with Administrators closing down each business.

Clearly, the terms of the CVA are crucial to a successful restructuring effort. It is a binding agreement between a company and those to whom it owes money.

This means that the directors must be honest with themselves about the problems and must take advice from experienced advisers, who will have carried out an in-depth and detailed look at every aspect of the business to identify what can be saved and what cannot.

Crucially for CVAs to succeed, they need to be realistic in terms of retaining debt that can be serviced, including any CVA contributions, but the underlying business needs to be viable with sufficient profits and cash flow to justify survival. If these cannot be achieved they will fail.

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