Do retail CVAs give national retailers an unfair advantage?

The virtues of the retail Company Voluntary Arrangement (CVA) have been widely broadcast over the past few years. A struggling national retailer can preserve value by shedding non-performing stores and achieving a rent reduction across the remaining portfolio. This mechanism has seen the re-sizing of several well-known retail and casual dining chains across the UK, preserving a significant number of jobs 

But can a CVA be the saviour of an SME with just a handful of stores?  

The benefit for the national retailer with dozens or hundreds of stores is that institutional landlords are forced to assess the impact of the proposal on a portfolio basis. This may see them losing rent on one location, taking a haircut on a second but preserving value and avoiding business rates falling back on them in others. The compromise is a pill that may just have to be swallowed (assuming the CVA does not cause unfair prejudice!).  

Where an entity has fewer stores, and typically landlords may only have a single store interest, the incentive to approve a proposal which sees the vacation or substantial rent reduction of their premises is unlikely to be approved by the affected landlord. Considering that the CVA will need the approval of 75% of creditors, a landlord with a claim including rent arrears, future rent, and dilapidations can quickly become a creditor with a stymying vote.  

So, what’s the answer? Well, it depends… 

How stressed is the company’s financial position and what is the real cause of that stress? Can funding help resolve the issue? Is there a particular store which is dragging down the group? Who are the creditors? What is the prospect of selling the business?  

These are just a few of the questions which need to be considered at an early stage.  

Where a CVA is unlikely to be approved, directors should be seeking advice about the most appropriate option to preserve value in the business and assets. This may mean undertaking an accelerated sales process, continuing to trade under the protection of the administration moratorium, executing a pre-pack sale, or even the sale of the business prior to liquidation.  

Qualified and experienced restructuring professionals will be able to work with the company to assess the realistic options available to it, either to avoid an insolvency process or to use a process constructively to maximise the value that can be preserved. Having advised several SMEs on options including trading administrations, CVAs, and pre-liquidation sales, Mercer & Hole’s Corporate Advisory Team is well placed to assist businesses in retail and other sectors, using whatever tools will deliver the best solution.   

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