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CVAs are 'a sticking-plaster solution'

More than half of retailers that underwent a company voluntary arrangement from 2016 onwards have fallen into administration, new research has shown. 

Data compiled by real estate firm Colliers International found that of the 23 retailers that underwent a CVA from 2016 onwards, 13 have since fallen into administration. 

Examples include Blacks Leather, JJB Sports, Mamas & Papas, Casual Dining Group, BHS, Austin Reed, MFI, Store Twenty One, Shoon and Toys ‘R’ Us. 

“In a retail world of structural change, where turnover or profit has not been covering debt costs, many retailers have been going into automatic administration or have undertaken CVA,” said David Fox, co-head of retail agency at Colliers International. “The CVA was designed to help struggling businesses and to avoid administration by lowering costs, rent roll, undertaking store closures and reducing staff numbers. However, it does nothing to address the high debt levels. That requires restructuring, refinancing and/or debt write-off. As our analysis reveals, for many brands, the CVA therefore fails and an administration will result. It is clearly not a mechanism that can be guaranteed to deliver a long-term viable solution, it merely just delays the inevitable future failure, pushing out the problems for the next couple of years, and creating even more polarisation in the market place.”

Fox added that some have been using CVAs “opportunistically” to renegotiate terms and reduce costs: “Some operators who have not necessarily been in financial difficulty have also been using CVAs opportunistically to free themselves from the leases or renegotiate terms on underperforming stores as a route to reduce costs. With rents reduced by CVAs, other retailers as such have started negotiating rents down, arguing that they want a level playing field, so landlords have been suffering across the board. In turn, this is having a countrywide negative effect on the viability of dozens of shopping centres.”

He added: “In a number of these instances, some of the companies that have been through these processes have been a direct result of highly leveraged private-equity buyouts, and the entire business model has been unbalanced by obligation to meet loan repayments. The private equity houses would use the debt to ramp up expansion and profile of brands, receiving capital inducements from landlords further leveraged against what can now be viewed in retrospect as high rents.”

“In the context of wider structural changes within the retail sector and changes in shopping patterns, this process could be considered the game of today but the CVA of tomorrow – a sticking-plaster solution to cover up a wider issue.”

 

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