The death of the company voluntary arrangement may have been greatly exaggerated.
The restructuring tool favoured by struggling retailers and loathed by landlords in the run up-to and during the pandemic has again been linked to major companies after a two-year break.
CoStar News revealed this week that designer fashion group Robert Goddard, which has 10 stores in the UK, was pursuing a now-approved CVA.
Budget general goods chain Wilko is increasingly expected to proceed with a CVA across its estate, the Sunday Times reports. The newspaper reports that this could see it seeking rent reductions at as many as 240 of its 400 stores. Landlords are waiting to see if cinema group Cineworld will also employ a CVA in the UK when it likely exits Chapter 11 bankruptcy next month.
CVAs have been little used in the last two years as market conditions have improved for retailers. They are legally binding agreements with a company's creditors to allow a proportion of its debts to be paid back over time and need 75% of the creditors, by value, to support the proposal. For a review of why they have been controversial in the UK click here.
Rising energy costs, inflation and interest rates have all been expected to lead to distress again in the retail sector, potentially prompting a return of CVAs.
Experts suggest that if they do re-emerge, they will be very different to the formula used in the past that was so hated by landlords.
One legal adviser who declined to be quoted explained: "Broadly speaking CVAs have been really quiet since Clarks [shoe stores] a good couple of years ago and there are a number of reasons. One of those is that landlords routinely started challenging CVAs and that has made it much more difficult to sell them as an option."
Another key factor has been the rise of the new "cramdown" restructuring plan that is being employed by Fitness First and Prezzo.
These are intended as full financial restructurings rather than operational restructurings. But a legal expert close to the proposals that have emerged so far describes them as "landlord CVAs in all but name".
"If you look at how they are being employed they are not impacting the secured lender at all but leaving them untouched and using those secured lenders to vote to cram down the unsecured lender, the landlord."
Another factor is companies have been insulated against distress to a degree by the protections put in place during the COVID pandemic, including restrictions on evictions. In particular Coronavirus Business Interruption loans have helped businesses. Many of these loans are maturing and this could be a trigger for restructuring plans.
Another factor is the legal precedent created by various landlord victories against CVAs, most notably the rulings against New Look's CVA. The court in the case of Lazari Properties against New Look found that, to be equitable, a class-based approach should be taken, ruling: “There would be strong grounds to conclude it was unfairly prejudicial where a CVA, which compromises the claims of a sub-group of creditors, is achieved only because of the votes of a large swathe of creditors who are unaffected by the CVA, even if there was an objective justification for those creditors being unaffected by the CVA”. In short, it ruled it was unfair unaffected creditors, such as non-landlords, are able to vote for a CVA which affects the landlords.
Mathew Ditchburn, partner and head of real estate disputes at Hogan Lovells, said: “It will be really interesting to see how any new CVAs are formulated now. Previous CVAs were very much focused on the landlords by reducing rents and changing leases, but were in many cases approved on the strength of the votes of non-landlord creditors who were left largely untouched. The New Look case, and the more recent ruling about the [developer] Mizen Group CVA in favour of Peabody Construction, suggest that vote swamping of impaired creditors by others who are unaffected is likely to be unfair. That could mean fewer landlord CVAs, or that CVAs will have to treat creditors more equally in future to make sure that the vote is fair."
Jonathan De Mello, founder and CEO of retail consultant JDM Retail, says the lack of CVAs over the past few years is partly because COVID hit retailers so hard. "Many of them ‘did not pass go’ and went straight into full administration. The remaining businesses came out of the pandemic leaner – having already negotiated low and concessionary rents with landlords. The spiralling cost of living since then has piled pressure on retailers however, with lower demand and significantly increased costs across their P&L."
De Mello says that while lower rents will help "they are in my opinion not the issue".
"Rents have already fallen by over 30% in the UK since 2019, and business rates have fallen significantly this year too. Retailers engaging in a CVA these days might be quick to blame property costs, but fundamentally it is their own business model – and business decisions – that are the issue here."
De Mello says CVAs are also potentially dangerous for retailers. "The likes of Wilko are reportedly suggesting that they do not plan to close any stores as part of the process. They run the risk of landlords forcing them to do so – as is their right – if Wilko also demands lower rents, and there are headlines that they ‘might not pay rent for three years'. This could well lead to Wilko losing some of their best and most prime stores to other operators, with quite a few retail and leisure operators in active discussions with Wilko landlords currently."
The Landlord View
The market is reviewing how CVAs that were structured over the last few years have evolved. One leading landlord, who declined to be quoted on the record, said a large number of leases now sit outside the CVA agreement after leases were renewed, often at pre-pandemic rents or on an open market basis.
"Each CVA was slightly different. There was a bit of a formula which we as landlords were not very happy with and that the British Property Federation helped to challenge in terms of some egregious clauses added. They were often for three and five year periods and a lot of them are coming up for expiry."
Often the CVAs included rolling break options for landlords and as the market has improved this has created uncertainty for operators, particularly at strongly performing retail parks.
"The issue is operators had to give landlords breaks and that introduces uncertainty for retailers," the landlord continued. "What happens if you want to reinvest in a unit both from a shop fit point of view and also from a shop order point of view. The question is will I have that unit in a year? There is strong competition particularly on retail parks from the likes of Lidl and Aldi and Home Bargains attracting adjacencies and other retailers."
There is also keen interest in what Cineworld will do when the British cinema operator emerges from Chapter 11 bankruptcy protection in the US, which it expects to happen in July. The chain has said its proposed debt restructuring has the backing of most of its lenders.
Market sources say that in the UK, the chain has been discussing lists of leases it wants to assume and reject with landlords.
Legal sources suggest that it appears that when a Chapter 11 protection order is in place in the US then that country assumes jurisdiction over the rest of the world, so if a landlord attempted to sue the chain for non-payment of rent in the UK, Cineworld could countersue the landlord in the US.
One adviser close to discussions said: "The market is seeing notices of leases Cineworld would like to assume or reject. They are, though, telling landlords they would like to reject some leases but saying if we can negotiate a concession we will assume it."
It therefore seems unlikely Cineworld will pursue a CVA or restructuring plan and it is possible very few if any leases will be terminated.
"It is a better process in the US with a far better level of information. Creditor engagement is incredible. What has been wrong with the process in the UK is there has been no engagement with landlords and no information and it is very expensive to try to resolve this."