Popularity of CVAs declining as number falls by 55% in five years
The number of retailers entering insolvency has increased by 7% in the past year from 999 in 2015/16 to 1,071 in 2017/18 says RPC, the City headquartered law firm.
RPC says that the retail sector continues to suffer from a high cost base whilst the shift in sales from the high street to the internet continues to pick up pace.
Additionally, struggling retailers have been hit by the withdrawal of credit insurance, which is often an indicator of financial distress, and can be the final straw before a company enters insolvency.
Recent research from RPC shows that sales at the UK’s Top 20 e-commerce only retailers jumped by 23% last year to £8.4billion, whilst footfall on the high street fell by 6% in March, the largest year on year decrease since 2010*.
RPC says that despite the high level of insolvencies in the sector there has been a 55% decrease in the use of Company Voluntary Arrangements (CVAs) in the retail sector, from 33 to 15 in the last 5 years. The failure of some high profile CVAs, such as BHS and Austin Reed, may have made both businesses and creditors more wary before entering into them.
CVAs enable a company to either reduce or reschedule the debts owed through compromise with its creditors, avoiding a formal insolvency process, as well as a large-scale restructuring of the business.
Retailers to have either recently entered a CVA or reported to be negotiating one include:
Toys R US – Toys R US had agreed a CVA two months prior to its administration
Carpetright – The retailer announced the closing of 92 stores as part of a restructuring plan to avoid administration. It is currently proposing a CVA
New Look – The women’s fashion retailer has proposed the closure of 60 stores in its CVA as well as 980 redundancies. Subsequently HSBC has withdrawn credit insurance for a number of New Look’s key suppliers
Mothercare is widely reported to be considering a CVA
Tim Moynihan, Restructuring and Insolvency Senior Associate at RPC, says that many high street retailers have a cost base that remains stubbornly high.
Says Tim Moynihan: “It is hard for retailers in the UK to shed expensive excess space as their lease agreements restrict that option. Increases in the minimum wage and a rising rates bill also make it very hard to cut overheads to make up for sales lost to the internet.”
“For under pressure retailers, a CVA may represent a neat solution to its problems for a short period of time. However, the reality is if it doesn’t address the structural weaknesses in a particular business and if trading continues to decline it is only delaying administration or liquidation.”
“There is also a risk of CVAs being commoditised and turned into a product to be rolled out to retailers rather than each one being the bespoke and flexible solution that the legislation envisaged – and creditors consequently being less supportive of it as a process.”
“Creditors are wary about agreeing to a CVA unless they think the business has a viable business plan for it to continue. Ultimately, it will be the creditors who lose out when the business fails.”
Karen Hendy, Corporate Partner at RPC, comments: “Structural changes in the retail sector and market conditions have created serious challenges for the traditional retailer.”
“Some struggling retailers may be seen as attractive acquisition targets for large retail groups or private equity houses but to get those deals done sellers and creditors have to be realistic. Bidders only to have to point to weakening consumer confidence to emphasise the pressures on trading and deal pricing.”
*British Retail Consortium