In the battle for survival in U.K. retail, solidarity appears to be in short supply. There was yet more turmoil in the sector in 2019, with sentiment deteriorating between failing retailers, their less damaged competitors, and the landlords that rely on their rents.
Much of the rising animosity can be traced to Company Voluntary Arrangements, or CVAs, which have become the go-to rescue measure for retailers facing ruin. CVAs allow a company to reach an agreement with creditors to pay part or all of its debts over a fixed period. The arrangements often result in large-scale store closures and rent reductions for retailers, with landlords regularly outvoted on the terms by larger creditors, such as bondholders, debt providers or suppliers.
There were six CVAs among medium and large retail businesses in the U.K. in 2019, according to recently published research by real estate services firm Colliers International. While this was down from 15 CVAs in 2018, the scale of some of the retailers entering CVAs in 2019, such as department store chain Debenhams PLC and retail giant Arcadia Group Ltd., strained relationships in the sector.
David Fox, co-head of retail agency at Colliers, who compiled the research, said in an interview that there is an increasing wariness among retail landlords toward the CVA process and those retailers considering its use. "There's the old adage of 'better the devil you know.' Some of us [in the retail property sector] have got a bit fed up of the devil, and we'd rather see what a different tenant has to offer," he said. "There are, frankly, dozens of shopping centers in this country which are really feeling the squeeze through CVAs and corporate restructuring, and it is affecting the viability of those shopping center businesses."
Landlords' willingness to push back against CVAs attracted public attention during negotiations to rescue Arcadia Group last June. While a group of landlords that included Landsec, British Land Co. PLC, and Hammerson PLC eventually approved the retail group’s CVA, Intu Properties PLC publicly opposed it. The terms of the approved deal, which remained private, resulted in rent reductions of between 25% and 50% across 194 of Arcadia's 566 U.K. and Irish stores over a three-year period, the BBC reported.
Ed Cooke, CEO of U.K. retail property industry body REVO, said that landlords' rising anger toward CVAs is justified. "The CVA process as an insolvency procedure was never intended for large corporate restructuring," he said, adding that it was intended to help "mom-and-pop" retailers in negotiations with creditors, and provide short-term relief while they managed their cash flow. "What it is now being used for is a tool to reduce rent liabilities, and not much else."
Landlords aren't alone in their displeasure. "On the retailer side, we are certainly seeing huge anger within the successful part of the retail sector, which is significant, about the misuse and abuse of CVAs by their competitors," Cooke said. Intu's resistance to Arcadia's CVA was based on the unfair advantage the retailer would gain over full rent-paying tenants, it said.
Hotel Chocolat Group PLC is the latest major retailer to publicly object to competitors' use of CVAs to get rent reductions. CEO Angus Thirlwell told PA in early January that he is sick of being "punished for being successful," and called for clauses in rent renegotiations to match any rent cuts pushed through by rivals via CVAs.
Cooke believes a fundamental problem with the CVA structure is that the management of companies using the process remains in place despite it very often being the "same management that got the business into trouble in the first place."
Fox's research for Colliers found that CVAs more often than not failed to prevent retailers from entering administration, which the CVA was designed to avoid, he said. Administration is another form of insolvency that aims to rescue a company through restructuring or liquidate its assets to repay secured and preferential creditors. Of the 23 retailers that have undergone a CVA since the beginning of 2016, 13 have entered administration, Colliers data showed.
Action from the U.K. Parliament to address the misuse of CVAs is unlikely in the near future as the Brexit process means "government, civil servants and political figures have got much bigger fish to fry," Cooke said. Still, the U.K. courts could offer a route to changing the current CVA legislation, he added.
More CVAs are expected in 2020, particularly after a difficult Christmas trading period. "This year's must-have fashion accessory is going to be a CVA again with another worst December trading period recorded by retailers and retail REITs leading the sector down," Mike Prew, real estate equity analyst at global investment bank Jefferies, said in a Jan. 11 note. Retail sales fell 0.6% in December 2019 from the previous month, the fifth month in a row without growth, according to the Office for National Statistics.
"We may see this year a few more retailers disappear," Fox said. "And there's not a long list of them anymore because, frankly, we've already been through a lot of pain."