What is a CVA: A Company Voluntary Agreement is a type of insolvency proceeding, in which distressed companies can negotiate with their creditors to gain preferential payments terms, and relief from their debts. It prevents the business from entering administration and effectively grants it ‘breathing room’ to restructure the business and mount a turnaround.
Calls for an overhaul of the CVA process have reached fever pitch in the past few weeks. Propagated by a slew of high profile CVAs and a tumultuous start to the year which saw an 85% increase in CVAs in the first 3 months of 2018, versus the preceding 3 months according to the Insolvency Service.
Property companies have called for a rethink of how CVAs are deployed, and joining the debate are lawyers, bankers, consultants, and policy makers. The question which has been raised is whether the CVA is merely biding time before an inevitable collapse, a legitimate and useful strategic option for temporarily struggling but ordinarily solvent businesses, or whether it is being abused by those deploying it.
Landlords often draw the ire of their tenants; this much maligned group of property operators are infrequently the subject of sympathy. But given the frequency of retailer insolvencies and pleas for rent reductions are they due some? Property companies operate on long term leases to ensure profitability and reduce uncertainty in their business models. Recently a casual dining chain freely entered a 25-year lease at a shopping centre, only to tear up the lease less than 2 years in as part of their own CVA. Many of the public’s pension pots are actively invested in property funds as they are often perceived as a safe bet. This is at risk of being jeopardised when tenants are only able to fulfil less than 10% of their contractual obligations.
Though these property contracts were freely entered into, many retailers would argue that the past 30 years they have been subject to a ‘Hobsons choice’ presented by landlords. Who have demanded high rents on a take it or leave it basis, with upwards only rent reviews inflating their cost base on a yearly basis. They ascertain that the recent CVAs are a manifestation of multiple years of exploitative treatment which has now reached a breaking point.
When CVAs are agreed they are often done so begrudgingly by creditors, who see recuperating some of the outstanding debt as preferable to none if the debtors were to enter administration. The success rate of CVAs has had a poor track record over the past year, with Toys R Us, Maplin’s, and BHS all failing to convert their CVA into a sustainable business plan. Only when the CVA is accompanied by a significant restructuring and strategic redirection will they lead to an effective turnaround.
Of course, CVAs are not all doom and gloom. Used appropriately they can save thousands of jobs and continue providing services to the wider economy. Mamas and Papas were one such retailer to mount a revival off the back of their CVA, as were Café Rouge. With a defined rescue plan, significant cash injections, and a strong management team, there’s no reason why a previously successful business couldn’t become solvent again.
What has angered those on the other side of the CVA equation is the eagerness at which it has been deployed, and the perceived inequality between creditor and debtor when approved. The distressed retailer can in effect ‘roll the dice’ risk-free as a last-ditch attempt to resurrect itself. While the supplier is in a position of either being paid none or a vastly reduced amount of the principal sum.
It’s not just property federations which are incensed by the recent spate of CVAs. Nexttook the remarkable action this week to put a CVA clause in its property contracts. Which would stipulate that it would receive rent reductions equal to any given to neighbouring stores which have entered the CVA process. There is a perceived inequality of rental terms, and Nextare looking to get on an equal footing to others which appear to have been getting preferential treatment.
‘Skin in the game’, and an element of risk undertaken by both parties is the nature of business and contracts. Policy makers should look at how distressed businesses are allowed to have a chance to continue whilst retaining responsibility for their actions and maintaining obligations to their suppliers and creditors.
This needs to be coupled with a true review of rental terms and practices to ensure that a fair deal can be reached on both sides. The discrepancy of bargaining positions between landlords and retailers has been extensive for the past two decades. While power remains in the landlord’s favour to such an extent, expect to see more CVAs over the coming months as retailers seek to redress this imbalance through any means necessary. Ultimately, we hope to see a deal on property which will work for all parties involved.