Vol 10 (2013) - Issue 2

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CVAs: The Evolution Continues

When Richard Fleming stated publicly in early 2012 that a lack of large retail CVAs in 2012 would indicate that we, as restructuring professionals, have failed, we agreed completely. The combination of an overpopulated high street, over-expansion in the good times and increasing pressure on consumer spending, together with upwards-only rent reviews and the inexorable structural shift away from bricks and mortar, continues to point firmly in one direction: relentless pressure on retailers’ margins and a consequent need to constantly re-examine their highest fixed cost.

Retail administrations
Whilst a handful of retailers are expanding, many more are contracting now. PwC research2 found that more than 20 shops per day were closed in the first half of 2012, way up on the previous year, and the pace may be accelerating. La Senza, Blacks Leisure, Peacocks and Past Times (January), Game Group (March), Clintons Cards (May), JJB Sports and Optical Express (Sept), and now Comet (November), all larger retailers, each failed to adapt rapidly enough to the 'new normal' and became insolvent this year, with subsequent store closures.
Each of these took the administration route, most with at least an element of pre-packaged sale. Two had been subject to a previous CVA, and some others we know considered a CVA but were precluded from effecting one by liquidity pressure. Doubts as to business models and long-term brand viability, inter-creditor tensions and certain negative press reports regarding CVAs may have deterred management or creditors from considering CVAs for the others.
We have always made clear that CVAs are no magic bullet nor are they appropriate for every situation; a successful CVA needs all of the following conditions to be present: a core business capable of being saved (and funding to achieve the rescue), strong stakeholder support for the rescue plan (including secured creditors) and a confident management team which the stakeholders are prepared to back. However, it does seem peculiar that no significant retail CVA has been implemented in 2012, given how flexible and powerful they are: no other restructuring mechanism can reduce footprint and property costs so quickly whilst preserving the legal entity. It may be that the losers on the high street are now so fundamentally broken that only major surgery delivered by a pre-pack can help.

CVAs spread beyond retail
What we have seen this year instead of retail CVAs is their use spreading from the retail sector into sizeable hotels and leisure businesses. Travelodge and at least eight other hotel operators have undertaken CVAs in the last nine months, and Bowlplex (ten pin bowling), La Tasca (restaurants) and Fitness First (health clubs) have gone down a similar path. CVAs in the hotels and leisure sector are up 88% in the third quarter of 2012 compared to 2011.
These are sectors which face similar problems to retail in terms of depressed consumer spending and have the additional problems of (usually) longer property leases and higher capex requirements, and so we expect this trend to continue.

Parallel financial and operational restructurings
A recurrent theme, in our experience, has been that landlords feel that too much of the pain in a CVA is taken by them, and correspondingly not enough by the other creditors such as the banks. As a result, the ongoing development of parallel financial restructurings (be they consensual or by way of pre-packs and Schemes) and operational restructurings (via CVA) should be welcomed; landlords would, arguably, have a valid case if they saw peak of the market leases being compromised whilst 2007 LBO capital structures were not properly addressed.