Few retailers today would agree with Napoleon’s famous quip that England was a nation of shopkeepers.
Since 2015, the number of retail businesses entering into administration has increased by 30 per cent, according to figures from the Centre for Retail Research. Deloitte data show that between 2017 and 2018, the number of large retailers, operating 10 sites or more, that appointed administrators rose from 17 to 26.
But one process in particular highlights the recent plight of retailers. The company voluntary arrangement, an insolvency proceeding that allows financially challenged businesses to renegotiate debts with creditors, has become emblematic of the UK high street’s decline.
Since 2016, the number of retailers opting for CVAs has doubled, according to PwC, with prominent names including HMV, Carpetright, Mothercare and Homebase taking this route. Debenhams is expected to join the list after it fell into administration this month, while Monsoon is considering CVA proceedings. Philip Green is also understood to be exploring the process for stores in his Arcadia empire.
The purpose of a CVA is to allow a company to agree with its creditors — whether trade, landlords, HMRC or employees — to pay back its debts over a set period of time. In order for the arrangement to go ahead, creditors representing 75 per cent of debt must approve the proposal. Once set, all are bound by it.
Instead of entering into administration, the company is, in theory, able to continue trading and its directors remain in control.
The use of CVAs has risen as UK retail has become more fragile. A perfect cocktail of high rents, rising business rates, the growth of online shopping and lower high street footfall has hit bricks-and-mortar sellers hard.
“At the best of times retail has been a low margin business,” said Richard Hyman, an independent retail analyst. “It is very volume sensitive and that tends to magnify the impact of differences in trading economics . . . You only need a small proportion of the population to change their behaviour to have a big impact.”
For retailers with large property footprints, such as Debenhams, the CVA is largely a tool to renegotiate rents with landlords: usually one of the largest ongoing costs the business faces.
“The reason [a CVA] is used largely around rents is that [a business] can adjust its rents for a much longer period” compared with the one-off reduction in the cost of stock, for example, said Matt Smith, a private restructuring partner at Deloitte. He said this gave the business a better chance of returning to profit.
Adam Tomlinson, an analyst at Liberum, said all retailers were looking to reduce their rent bill. “When a lot of these rents were set years ago, they went into long leases and had upward only rent reviews, and at a time when acceleration into online sales was in its early days.”
The conditions have not been helped by a history of private equity ownership. According to Dealogic data, private equity retail buyouts hit a six-year high in 2015, with $6.1bn worth of deals done. BHS, House of Fraser, New Look and Toys R Us are among the private equity owned retailers that have undergone administration or CVA processes since.
At a time when margins were already under pressure, private equity’s habit of loading a company with debt and chasing growth has weighed heavily. “It’s just not intelligent,” said Mr Hyman who compared the demise of retail to “an Agatha Christie novel” with private equity as much to blame as wider economic conditions.
CVAs are proving a controversial escape route, with critics pointing out that the process allows flawed management teams to stay in control and does not address the fundamental issue of the structural shift to online shopping.
Since the process was introduced in 1986, just over half of retail CVAs have failed to save the company, with 18 per cent still ongoing, according to PwC.
Landlords have been at the sharp end of negotiations, having to accept lower rents over the threat of empty lots. Some have agreed to rent discounts of up to 75 per cent.
Ian Fletcher, director of finance at the British Property Federation, said landlords were not given enough time to consider proposals and had less power in the CVA voting process because their debts were spread over a long period.
He said some CVA proposals had requested that rent discounts continued after the period stipulated, something landlords considered “totally unacceptable”.
Deloitte said CVAs should only be used as part of a bigger restructuring, as private equity owned gym group LA Fitness did when it undertook a CVA process in conjunction with new loan facilities in 2014. It returned to health and was later sold to Pure Gyms for between £60m and £80m.
“CVAs have become popular because stores are becoming progressively less economic and retailers aren’t able to grow their sales,” said Mr Hyman. “But it usually ignores that they’re not very good at retailing and they need some strategy to address that.”