​Analysis: Does the CVA need a restructure of its own?

When the British Property Federation (BPF) took an unfamiliar stance in response to House of Fraser’s CVA plans by launching a fiercely worded riposte, the sector stood up and took notice.

“Highly insensitive” was how the BPF labelled the way House of Fraser coupled news of its restructuring plans with the promise of new investment from Hamleys owner C.Banner, while at the same time asking landlords to take a rental hit.

The trade association also slammed House of Fraser for failing to enter into “constructive dialogue” with creditors before last week’s announcement and claimed that, as a result, any support for the CVA would be “given grudgingly” by its landlords.

But it was the BPF’s equally scathing verdict on the CVA process more generally that arguably landed the heaviest blow in its hard-hitting statement. The body, which represents hundreds of property owners and investors across the UK, argued that the insolvency process leaves landlords “particularly compromised” and allows retailers to “rip up contracts freely entered into”.

And it attacked retailers for putting pensioners’ savings – which are invested in property – “at risk” by launching CVAs.

Breaking point

Such words suggested that the BPF and its members had reached breaking point following a flurry of CVAs over the past six months.

Toys R Us, New Look, Carpetright and Select have all turned to the process since December in their efforts to restructure their businesses – and there are more to come.

House of Fraser aims to launch its CVA in June and the list of other retailers rumoured to be mulling similar moves – including Poundworld and Mothercare – grows longer by the week.

Knight Frank head of retail research Stephen Springham suggests that the growing tendency among businesses to launch CVAs has stemmed from witnessing others “abuse” the procedure.

“CVAs were originally conceived to save retailers that otherwise had sustainable futures, but were under a financial squeeze that could be alleviated. The waters have got a lot more muddied”

Stephen Springham, head of retail research, Knight Frank

“The CVA process has never been a perfect system and, to be honest, it is open to abuse,” Springham says. “Each one that comes along seems to push the boundaries an extra yard or so. What wasn’t great from the outset in terms of a process is becoming increasingly unfit for purpose.

“There seems to be a bit of a disconnect between genuine distress and retailers that are just underperforming.

“CVAs were originally conceived to save retailers that otherwise had sustainable futures, but were under a financial squeeze that could be alleviated. The waters have got a lot more muddied since then.

“We’re almost reaching the point where if you’re a retailer it seems silly not to do a CVA if everyone else is getting away with it.”

Revo president Mark Williams agrees. “CVAs were well-intentioned when the legislation came through – everybody supports anything to keep business going, to save jobs and to bring back vitality. 

“But the CVA process can result in a retailer being able to change their contractual liabilities at whim and it creates an unfair playing field,” he argues.

“Debenhams will be sitting there going ‘how come I’ve got property that I’d like to get out of and House of Fraser can change things?’ It’s unfair on retailers that are successful – it’s rewarding failure.”

“For tenants who are working their socks off to honour their lease obligations like us – paying contracted rents – to see others being bailed out or have deals cut is very unsavoury and leaves a bad taste”

John Cheston, managing director, Smiggle

Smiggle is one of the successful businesses Williams refers to. The children’s stationery business has built a portfolio of 130 stores over the past four years.

Its boss John Cheston doesn’t hide his anger towards the way CVAs are now being used and has called on landlords to take it upon themselves to level the playing field.

“For tenants who are working their socks off to honour their lease obligations like us – paying contracted rents – to see others being bailed out or have deals cut is very unsavoury and leaves a bad taste,” Cheston says.

“Landlords need to respect those tenants who are paying full freight for their units, and if rental deals are being offered to failing businesses these should be offered to all tenants. Favouring one set of tenants over another is not in the spirit of a healthy business relationship.”

Time for reform?

With friction building and a groundswell of opposition seemingly mounting among retailers and landlords alike in the wake of House of Fraser’s announcement, could the CVA process as we know it be on the cusp of undergoing a restructure of its own?

BPF director of real estate policy Ian Fletcher thinks so. “Reform is something our members would like to see,” he states.

“Things like the voting structure on a CVA are not particularly codified and it varies from one CVA to the next. A smart practitioner will obviously structure the vote in such a way that there is a strong chance the retailer will get the support they need.

“Change is needed, but our members are deeply frustrated. Any change in the parliamentary process is a challenge at the moment because almost all time is devoted to Brexit. Any change to primary legislation is unlikely to happen quickly.”

However, one retail property director insists such a reform would be heavy-handed and advocates that, as the retail landscape shifts to adapt to rising operating costs and multichannel challenges, the manner in which CVAs are used has had to evolve, too.

“If you look at the House of Fraser example – is it immoral to try to save 15,000 jobs? Is it immoral to try to put the business on a better footing? Is it immoral to try to preserve business for the 50 or so brands that supply them?

“As retailers, we are facing into the eye of the storm. Some people will say CVAs are being used in a different way compared to 2008 and 2009, but the high street is a very different place to be now, so of course they are.

“It’s hard to control costs when you’ve got to pay staff a living wage that is increasing every year, you’ve got to pay rising rents and business rates, you’ve got an online business that is expensive to maintain.

“Retailers have to look not just at what their cost bases are now, but how those cost bases will grow in the next few years and take action sooner rather than later. CVAs are a tool that allows them to do that.”

With that in mind, Williams suggests that, rather than restructuring how CVAs work, the Government would be better off looking at the factors that are pushing retailers towards a CVA in the first place.

“If the Government have been taxing a golden goose, that golden goose is well and truly dying”

Mark Williams, president, Revo

 

He says most retailers looking to shutter stores are doing so to strip back their heavy business rates burdens, rather than rental bills.

“The Government has got to wake up and smell the coffee,” Williams pleas. “The issues that face towns and cities across the UK are fundamental – and people have been saying this for a long time.

“Property taxation has got to be addressed immediately. You’ve got to look at the fairness of trade between the internet and bricks-and-mortar to make sure they are paying fair amounts of tax relative to each other. If the Government have been taxing a golden goose, that golden goose is well and truly dying.”

Williams also believes the Government should hold retailers launching CVAs to account.

“The House of Commons committees are quite effective at calling people to account. Public scrutiny of what’s going on is often as effective as legislation – calling in accountants and calling in retailers to explain their actions is an effective tool,” he says.

“Putting companies under public scrutiny to be more transparent (particularly when they employ thousands of people) and having the chief executives in front of the House of Commons committee, answering questions about what’s going on, why a CVA is needed, is something they should do.”

If the vehement reaction to House of Fraser’s CVA plan is anything to go by, change of some form could well be in the pipeline.