22 May 2024, 12:37
By Furniture News Feb 25, 2019

Coming to an arrangement – the pros and cons of CVAs

Each year, Furniture News asks some of the UK’s top retailers to share their views on some of the most significant industry developments, and how these might impact their future. In an excerpt from our annual Year in Review special (which features in the January issue), we ask the panel's members for their thoughts on a process which loomed large in retail throughout the year – the CVA …

Last year saw numerous overstretched nationals reach breaking point. From Carpetright in April, to House of Fraser in May and Mattressman in June, many of these opted to enter a Company Voluntary Arrangement (CVA) process.

CVAs are insolvency procedures which allows companies with debt problems to reach a voluntary agreement with their creditors around repayment. Implemented correctly, they can help a business effectively reset their responsibilities – in retailer cases, this often means seeking to rationalise store estates and overheads.

We asked our retailer panel if they were critical of CVAs, or whether they felt such procedures might be the only way through for these beleaguered nationals …

Peter Harding (Fairway Furniture): The recent spate of CVA-based restructures has thrown the spotlight onto the fragility of the big-ticket retail sector more than ever. Multiples that had continued to trade – and in some cases expand – in a marketplace where demand for bricks-and-mortar stores was declining could be seen as folly. Failure to adapt to changing retail trends, lack of coherent offerings across all retail platforms and, of course, the demands of excessive business rates, all played a part.

My own view is that CVAs are a tool which in essence shouldn’t be used for what in the past would have been a full corporate restructure. Their use as a bargaining tool to force landlords and other creditors into giving the company better terms makes a mockery of the system – and ultimately hurts those who bear no responsibility for the position the CVA-seeking company has found itself in (often through mismanagement).

Gavin Boden (retail and sales professional): I feel CVAs are too much of an easy get out at the moment. I understand that they save jobs, but in the long-run they may force suppliers out of business.

Steve Adams (MattressOnline): The CVA process offers benefits for both the retailer and its creditors. It enables the retailer to keep staff, continue their relationship and responsibilities with their customers. You could argue it’s unfair on the creditors, but what is the other option?

If the retailer could trade out of their cash flow issues, they would. Without a CVA, the creditors would be picking at the bones of whatever assets are left – with a CVA, they will hopefully get a higher percentage of the debt back.

Ross Beveridge (Grampian Furnishers): CVAs should be seen as a last-ditch attempt to save a company – requiring 75% of creditors’ approval, they’re no easy route to safety.

More often they are used to thin out the estate, either removing the underperforming areas or renegotiating historically high rents. With overstated rents and rates up and down the country and increasing cost pressures – from everything from the weakening of the pound to increased wage demands – many companies have been forced to use this as the only viable option to continue trading.

Some have undoubtedly not only survived but benefited, and others have tried in vain, only momentarily delaying the inevitable. Without a reduction in rents, landlords could be faced with a further wave of CVAs, and retailers are widely seeking to share space through concessions or trade from smaller footprints to counteract their responsibilities.

Of course, CVAs bring additional strains such as a reduction in credit facilities and insurances, not to mention job losses. Many suppliers have also been caught in the crossfire, and can be left in difficult positions themselves.

Steve Pickering (Sussex Beds): The 18-month trading period running up to the Brexit vote was strong and, for us, the best period of trading for a decade. During the 12 months that followed we saw significant falls in footfall and, in turn, sales. This stabilised during the subsequent 12 months but remained flat with uncertainty remaining. Combine this with changing buying habits – with online competition and sales increasing – and this has pinched the weaker retailing business to a point of necessary restructuring.

Businesses need to change and evolve to meet the changing environments they trade in. Sometimes the flexibility required to meet these changes is only available by means of a process such as a CVA, and in particular for retail the ability to release a business from well-intentioned lease commitments which are either no longer fit for purpose or uneconomical.

At this point, rather than a business collapsing and ceasing trading completely, with all the damage to jobs and creditors that would bring, through the means of a CVA process a restructured business can emerge, and prosper.

Read more feedback from our panel in the January issue of Furniture News.

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