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Mothercare CVA 'makes mockery' of landlords

Mothercare was accused of “making a mockery” of landlords after its company voluntary arrangement (CVA) was approved by creditors on 1 June. 

The embattled mother and baby retailer announced that plans to reduce its portfolio by a third – including 50 store closures – had been backed by 75% of creditors.

One property source told Drapers: “The New Look experience shows that some landlords are going to exercise break clauses and what Mothercare is doing is saying: ‘I need a 35% reduction in rents to keep the business steady.’ It will negotiate from then on. But this shows that retailers are making a mockery of the system – they are not treating all creditors the same.

“Under the veil and perception of a CVA they are going to sit down and negotiate a rent reduction. If they don’t get that agreement, they can break the lease. CVAs are being used as a tool to get out of lease obligations. It is the pension funds that own the real estate that are suffering – not the banks or shareholders.”

Retail analyst Richard Hyman agreed: “In this market, people should not view voting in favour of a CVA as a vote of confidence. It’s a vote of choice between the devil and the deep blue sea. It’s a vote of desperation, rather than confidence. What are Mothercare’s chances of surviving? I wouldn’t put them too high.

“CVAs are the current fashion, but they are not the wonderful get-out clause people seem to think. Where in the CVA does it say about how Mothercare is going to grow sales? If you carry on doing the same thing, in the same way, why would the outcome be any different?

“Mothercare’s market is going to stand still at best or maybe shrink. When they shut 50 stores, underlying costs will still be going up. What are they going to do to widen the gap between costs and sales instead of narrowing?

“And what about the suppliers? Suppliers are over a barrel in a way that landlords may be less so. They are obviously feeling very vulnerable.”

KPMG was appointed to oversee the CVA process, which will reduce the UK portfolio by more than a third from 137 to 78 by 2020. In addition, Mothercare is seeking rent reductions on 21 stores.

As part of the CVA announcement Mothercare said it would raise £28m through a refinancing, which it expected to complete in July.

Another property source said: “We will undoubtedly see more CVAs, but landlords have got to get real. Rents for some of these businesses are just too high. The CVA system allows companies to try and re-float and go from there. Part of the reason they end up in a CVA is their own doing, but there has also been a channel shift and upward only rent reviews, it’s not all one-sided.

“I was slightly surprised that Mothercare was forced into it, with the lease expiry profile they have. But landlords need to ask themselves, is the store worth more than the tenant is proposing? If so, re-rent the store.”

Another property agent who advises landlords on out-of-town properties questioned whether Mothercare’s actions will lead to a change in the rules or an inquiry into the CVA process: ”It looks like Mothercare is pushing through with a CVA that cuts costs without the penalties.

“The CVA rules need looking at. Some of the landlords are getting legal advice now, especially on other CVAs such as House of Fraser.”

 

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