CVAs - tackling a symptom not the cause?

Ros Goode, Head of London and Restructuring Solutions


Type Perspective

Date 29/06/2018

You can’t be sure how familiar the general public would have been with the term CVA before 2018.

However, with 18 companies using either a Company Voluntary Arrangement (CVA) or going into administration since Q4 2017, touching the high street, out of town retail, food and beverage and now a department store chain, it is now a part of a modern consumer lexicon. The very fabric of our towns and cities is being challenged in a very public way.

The CVA process has been a very effective mechanism over the years, dating back to its inception in 1986. Mamas and Papas is a good example of it being used effectively, when the restructure, accompanied by investment into an online platform, saved the business in 2014. Likewise, the successful CVA initiated by Travelodge back in 2012.

However, a CVA should only be used when, in the absence of the restructure, the business will fail and fall into Administration or Liquidation, thus leading to potential closures across the board. The perceived problem that has emerged through the recent spate of CVA approvals is the interpretation of the ‘insolvency’ in the alternative. The definition is viewed as being stretched by a number of stakeholders and the opportunity for retailers to use it as a means by which to extract themselves from landlord obligations and liabilities is arguably a clear and deliberate act of corporate irresponsibility.

The CVA backlash is now growing.

The BPF is constructively making a strong case for the CVA process to be tightened up with a ‘code of practice’ that is developed by engagement with the IP community, while Revo has stepped in as a voice of the retailer and is actively engaging with HCLG (Homes, Communities and Local Government). Further, impacted retailers like Next arguing strongly for CVA clauses in new and renewed leases to enable rents to be benchmarked to those operators within locations that are benefiting from compromised rents from successfully implementing a CVA, thus gaining what might be perceived as an unfair competitive advantage.

However, whilst addressing the structure, use and application of a is clearly important, it is only a short term solution that treats the symptoms of a problem.

We are living in a world where retail behaviours are driven by customers wanting convenience, speed and experience. Online shopping has grown five-times since 2008, which, allowing for the global financial crisis when consumer appetite was muted by the economy is arguably over a five-year period and continues at a pace. There is an acknowledged over supply of retail space and the burden of Business Rates, wage costs, rising costs due to the strength of the pound, combined with reduced consumer spending, means that the market is in need of significant consolidation across a number of retail subsectors. The aforementioned comments could easily be applied to other sectors driven by discretionary spend such as leisure and casual dining.

Putting the use of CVAs as a restructuring tool to one side, we need to address the cause of the issues. A response is needed at a national and local government level in order to rise to the challenges of the high street. These are the heartbeat for local communities, part of the fabric of our cities, and we need to respond at all levels. We need to start looking out at the road ahead, rather than fixating on the rear view mirror. We need to establish a Cross Industry Collaboration group, that brings together key stakeholders in government, business, finance, real estate and technology and that focusses not on how the high street and retail used to function at its best, but how its vitality can be restored so that it is fir for purpose in the current consumer climate. We are in unchartered territory but we must try to map out the road ahead for the good of us all.