With figures from the Insolvency Service showing an 85% leap in the number of CVAs in the first three months of 2018, REL Capital chairman Andy Scott asks if the latest wave is being used as a disingenuous attempt by major brands to dodge their rent commitments
A Company Voluntary Agreement (CVA) was intended for companies that are insolvent or in distress to pay their debts over a fixed period, with lower costs than an administration, and allowing owners to stay in control to steer their ship to calmer waters, continuing to trade long term whilst restructuring their debts.
Amid a triple whammy of rising property costs and business rates, exponential rise of internet sales and a decline in consumer spending, customers have inevitably been taken away from the high street and casual dining restaurants have been hit hard. High profile CVAs this year include Byron, Jamie’s Italian, Prezzo, New Look and Carpetright with House of Fraser Mothercare and Carluccio’s all set to follow in the coming weeks.
The rise of the ‘landlord only CVA’ is seen by many as unfair, where chains use what was meant as a genuine insolvency tool to effectively cut rents on their underperforming or over rented sites. Next, the retail giant run by Lord Simon Wolfson, believes CVAs give an unfair advantage to competitors by allowing them to lose leases, while better-run companies are forced to honour expensive commitments. Its competitor, New Look managed to slash rents by up to 55% on some of its stores. Given Next has managed to renegotiate 29 leases this year through dialogue with landlords, surely this is the example chains should be following before taking the new fashionable CVA route. Private and institutional Landlords are calling for legislation to curb the rise and loophole that allows retailers to say their large rents ‘could’ make them ‘contingently’ insolvent, which is surely a misuse of the insolvency system.
The Carluccio’s proposed CVA is interesting as the chain’s most recent accounts from last June show revenue climb 2.7% to £140m, but its pre-tax profits took a catastrophic tumble from £5.2m to £982,000. While growing labour costs in the food and drinks sector are often cited for such huge drops in profitability, on closer inspection, it was due to an exceptional cost related to assets of £4m, so profits were still c£5m in its last accounts. Carluccio’s has since declared itself debt free, making it able to offset softer trading conditions - yet is now pleading insolvency and needs to cut rents on a percentage of its estate to survive, citing the saving of 3,200 jobs to ensure it goes through, somewhat disingenuously.
One of the most contentious aspects is the voting. To push through a CVA, a company has to convince an accountancy firm such as KPMG (who have their own PR problems at the moment), that it is ‘close’ to going bust, then secure votes of at least 75% of its creditors by value. All unsecured creditors are allowed to vote. Landlord-only CVAs are easily approved because lenders and suppliers have a vested interest in the company’s survival and no prospect of losing out, so it is no surprise that they vote these Landlord CVAs through.
Secondly, private equity owners often promise further investment on the other side, once the fat is shredded. So they are able restart the overheated engine and immediately grow the estate and increase profits again, with no downside or loss to the owners whatsoever other than accountancy fees. The only losers are the landlords who trusted in their tenant and bought into the concept or covenant.
Many people feel the CVA is a victimless crime, perceiving landlords as a greedy wealthy elite. But a private individual who has worked hard all his life, who owns an empty shop and has entered in good faith a 25-year lease to a national operator like Carluccio’s might reasonably expect them to honour that agreement, rather than hand the keys back with very short notice. The rise of the CVA could potentially undermine the credibility of the British retail and leisure property sectors, as an asset class for investors if it continues as expected.
If these new raft of CVAs do prolong the death of the high street, keeping these big beasts limping along until either further trading deteriorations or more change in consumer patterns, then so be it. Retailers and leisure operators should be given a lifeline to protect thousands of jobs and every opportunity to evolve, grow, prosper and find ways to trade under a new leaner structure, sweating the asset. There are plenty of success stories who have come out the other side, with the only alternatives of administration or liquidation looking very ugly for every stakeholder involved.
It appears the CVA is here to stay long term. But surely urgent legislation is required to ensure they are used as a genuine last-ditch effort to survive only, with owners suffering alongside those they leave behind to return an equilibrium between landlord and tenant.
- Twitter: @Andy_Scott_REL