Another day, another CVA...

Over the past two years we have, unfortunately become accustomed to announcements from retailers that they intend to launch a CVA and close stores. And it’s hardly a surprise that in retailer boardrooms across the country, and indeed internationally, senior executives are asking colleagues, “Why aren’t we using a CVA to dispose of unwanted stores?”

Debenhams is the latest high-profile example, and while this news would have come as little surprise to many EG readers the tone and language of the statement itself may have raised a few eyebrows.

In its notification to shareholders Debenhams confirmed ‘the CVA does not seek to compromise claims of any creditors other than certain landlords…’, providing further evidence, should we need it, that the process unfairly targets property owners.

The fundamental inequity in the CVA process is what led us to call for greater scrutiny of how this insolvency tool is being marketed by advisors and used by retailers.

To succeed a CVA requires the support of 75% of creditors but given how the amount of debt attached to many retail businesses is calculated, property owners – the single creditor group affected – rarely get a meaningful vote.

In some cases we have seen financial alchemy from retailers to justify a CVA, or business owners which have chosen to extract significant value from the business over a long period of time attempting to exit leases and reduce rent liabilities to strengthen the balance sheet to the detriment of UK real estate.

The damage wrought by CVAs is far-reaching, and after a year of advocating for change we feel this message is finally starting to get through to Government.

As we know, pension funds are a major owner of retail property and so the epidemic of CVAs has a financial impact for us all.

The sudden closure of shops leaves gaping holes on the high street and causes damage to our urban fabric that will take years to repair. The fact that almost half of former BHS stores remain empty tells us that repositioning of former retail space takes time to deliver, and if handled poorly, it is communities who suffer.

Retailers who are trading successfully within their lease agreements, despite facing the same market and economic headwinds, also suffer a competitive disadvantage with rivals exploiting this process to lower commercial overheads. Lord Wolfson and Peter Cowgill, surely two of the best retailers the UK’s has every produced, have made this point publicly.

The spate of CVAs is also a major deterrent to investment in town centres and high streets, the very places Government claims it is committed to saving. The constant threat of retailer CVAs along with the archaic business rates system and inflexible planning regulations makes UK retail property a riskier and less attractive proposition for overseas investors, nevermind the uncertainty over Brexit. Moreover, the ease with which some retailers are terminating leases undermines one of the fundamental principles of our legal system, where contract is sacrosanct, which further impacts the UK’s global competitiveness.

But let’s be clear: CVAs are a symptom of what’s happening in the retail sector and not the cause.

Some retailers are keen to attribute all their problems to high rents, but in the vast majority of cases chronic underinvestment in the business and a failure to adapt to changing consumer preferences are the root causes. It follows that a CVA is rarely the determining factor in a business returning to profitability.

Used properly they can form part of the solution but we need greater scrutiny on how the legislation is invoked. We have urged Clive Betts MP to intervene and make retailers and their advisors accountable to the Homes Communities and Local Government Select Committee when this course of action is pursued to create greater transparency.

As an organisation which also represents retailers, we are fully supportive of reasonable measures that enables businesses to restructure and trade successfully – but all creditors and stakeholders should support that process, not just property owners.

Our conference in Liverpool on 18 and 19 September will bring together all protagonists involved in this drama and will act as a catalyst for change and a fairer application of insolvency tools in the retail sector.

Ed Cooke, CEO, Revo

This article first appeared in EG on 4 May 2019.