Company Voluntary Arrangements (CVAs) are unlikely to save struggling retailers and other businesses from administration, according to sector leading research by real estate advisors Colliers International.
Facing the need to shut sites and reduce rents to keep trading, businesses primarily in retail and casual dining are increasingly resorting to the CVA, an insolvency process that allows them to shed unprofitable sites and agree rent reductions with landlords to avoid the possibility of entering administration.
But Colliers’ National Retail Barometer, an analysis of CVAs undertaken in the past decade, showed the tool to be largely unsuccessful in saving a business from administration and that companies were twice as likely to survive following administration as they are from taking the CVA route alone.
David Fox, head of retail agency North for Colliers International, said 44 companies entered administration in the past 10 years without first undertaking a CVA. While almost 40 per cent continue to trade, more than 80 per cent of operators that agreed a CVA subsequently entered administration anyway.
Fifty per cent of the companies that went into administration following a CVA were revived albeit in a radically different size and shape. All of them survived by being bought out of administration in a pre-pack deal by other operators.
David said: “Therefore, the chances of surviving an administration have been double those of surviving a CVA. A CVA alone appears to be ineffective in preventing failure in the majority of cases.
“Without conducting a thorough business review and restructure, significant cost reduction, debt reduction and a cash injection, CVAs in isolation are unlikely to be successful and therefore, should not be relied upon as a means of saving a company.”
The year to date had witnessed an “unprecedented onslaught of bad news” for the retail sector with a raft of CVAs and administrations caused by a perfect storm inflation outstripping wage growth, thereby reducing consumer spending and confidence, rising costs and the seemingly relentless rise of fleet-footed online providers unburdened by the costs of bricks and mortar.
Toys R Us, Maplins and Jacques Vert have entered administration in 2018 with New Look, Byron, Prezzo, Select, Carpetright and House of Fraser seeking CVAs.
The Colliers’ research showed up to 10 store closures in Manchester resulting from CVAs and administrations in 2018, with a further five in Chester.
“So far in 2018, we have seen a flurry of new CVAs, in some cases from companies which would not be associated with failing brands and large debts. It is our view that the CVA process is being used opportunistically by some retailers to free themselves from leases on underperforming stores.
“It is conceivable therefore that we might see a dramatic increase in the success rates of CVAs in 2018/19 because fundamentally, these businesses are generally trading well and are in better financial shape than previous examples,” David explained.
Mark Charlton, head of research and forecasting at Colliers International, explained: “If other retailers follow the example of Next in requesting CVA clauses in new leases, to effectively level the playing field, then values are going to suffer”.
Looking ahead, David forecast that it was “only a matter of time” before retailers that continued to trade well and invest in bricks and mortar united with landlords to campaign for reform of the CVA process because it gave a cost advantage to businesses that had followed the CVA route.
A sample of 15 town centres in the Colliers’ research showed an overall vacancy rate of 12.6 per cent in October 2017, up from 11.9 per cent in October 2015 but this will increase because of the upsurge in CVAs causing a rise in site closures and an overhang from the collapse of BHS, with more than 100 of its large town entre units remaining empty.
In terms of retail rent, regional dominant centres such as Manchester and Liverpool have outperformed other locations, rising by five per cent between 2013 and 2018 but remaining nine per cent below levels of the post global financial crisis of 2008/09.
