Could a CVA be retail therapy?
2011 saw some major retail names collapse into Administration. The Barratts shoe shop chain was the most recent, following Dolphin Bathrooms, Habitat, Jane Norman and T J Hughes.
Thomas Cook, Arcadia and Peacocks have all announced plans to close hundreds of High Street shops. In December Blacks Leisure Group, owners of 208 Millets shops and 98 Blacks Outdoor stores, was forced to put itself up for sale. Even Marks & Spencer commented that although optimistic about the run up to Christmas they were pessimistic about the New Year.
Consumer confidence does not look like increasing in the New Year so many more retailers may have tough decisions to make in 2012. If your trading figures are down, your cash flow weak and your customers disappearing you may decide to shut up shop.
However if there is a chance that you have a business worth saving you might consider a Company Voluntary Arrangement (CVA). This is an increasingly common option used by both larger retailing groups such as JJB and smaller independent outlets.
If a company is insolvent but has a realistic chance of turning itself around and being able to carry on trading, it can enter into a CVA. This is a formal process to freeze payments to suppliers and other creditors with a partial repayment over time.
The whole process is overseen by a licensed insolvency practitioner.
To make the CVA work, creditors will agree to be repaid a percentage of what they are owed and typically over a five year period. Creditors often agree because if the company keeps trading they are likely to be paid more eventually than by shutting the business down. Often a creditor will also keep a customer this way.
A CVA is not a panacea for all of a retailer’s ills, but for the right company it does provide a lifeline which is increasingly finding favour with retailers and their funders, landlords, suppliers and other creditors.
It is particularly useful as it allows a mechanism for retailers to close unprofitable stores and release the ongoing rent burden.
Debts due to landlords and other creditors are frozen and often reduced, with the agreement of 75% to creditors by value.
The big advantage for management is that they remain in control of the Company with a view to ultimately returning value to its Shareholders.
However, a word of caution; if a CVA is to be successful any reorganisation of a business must address the issues that caused the financial difficulties in the first place. There is little evidence that the underlying economic conditions are about to improve in 2012, so any reorganisation needs to demonstrate that the business can trade profitably immediately.