Doubts raised over CVA process

After a series of high-profile retail collapses since the start of the year, company voluntary arrangements are back in the news.

Yet two recent unsuccessful attempts at CVAs – a mechanism whereby struggling companies agree deals with unsecured creditors to avoid entering administration – have sparked a renewed debate over their efficacy.

In May Clinton Cards plunged into administration after its debt was acquired by a supplier, but the greetings cards company had been considering options including a CVA as it sought ways to reduce its sprawling store estate. Last week a CVA proposed by a prospective buyer of Rangers FC, the football club, was rejected by the British tax authorities.

Restructuring specialists say that scepticism now hovers over the procedure, especially since the CVAs of many high-profile high-street casualties of the financial crisis did not ultimately prevent a slide into administration.

Examples include Focus DIY, which closed nearly 40 stores through a CVA in 2009 but still collapsed into administration last year, and Blacks Leisure, the outdoor clothing retailer, which shed more than 100 stores via a CVA in 2009 but was sold in January as part of a pre-pack administration deal.

“In the absence of new money, a new strategy and without addressing the operational levers key to success, CVAs are all too often destined to fail,” says Alan Hudson, head of UK restructuring at Ernst & Young. “They merely represent a short-term sticking plaster without genuinely addressing the fundamentals of what is wrong with the business.”

CVAs have existed since 1986, but their popularity shot up during the financial crisis when many retailers found themselves struggling to meet high rents on too many stores, a legacy of the pre-2008 expansion era.

“The sticking plaster is not an unreasonable analogy,” adds Richard Hyman, strategic adviser to the consumer business practice at Deloitte UK. “History shows a lot of businesses have been in CVAs more than once. I think that tells us something.”

However, whether the CVA will remain in fashion – given that more consumer sector insolvencies are expected this year – is what divides opinion.

“Fundamentally they don’t work,” says Gavin George, managing director of GA Europe, a retail restructuring specialist. Of the highest-profile retail CVAs to have taken place in recent years only JJB Sports and Blacks “are still alive in some form”, he points out.

He says that landlords have become more open to finding alternative remedies such as moving from quarterly to monthly rent due dates or agreeing reductions.

Others argue that CVAs remain a useful tool, but say that shrinking the number of shops cannot come at the expense of addressing other operational issues.

“Boards have welcomed this as a solution, but some of the harder yards around strategy, markets and operational issues are not getting dealt with at the same time,” says Mr Hudson.

Richard Fleming, UK head of restructuring at KPMG, agrees that a CVA alone is not a “panacea” for underperforming businesses, but notes that the benefits can go beyond simply reducing the cost of having stores. “A CVA can often pave the way for more equity to be put into the business,” he says, citing JJB as an example where shareholders were encouraged to meet a cash call.