Economic headwinds continue to make life difficult for retail and leisure operators. Wilko, of course, is the latest high profile retailer to enter administration, following on the heels of retailers such as Paperchase, Hotter Shoes and AMT Coffee. Cineworld's route out of Chapter 11 bankruptcy has involved the administration of its UK parent, although the operating companies have remained unaffected.
What has been interesting here is that in many of these cases, press reports on the financial difficulties facing the company suggested the apparent imminence of a CVA proposal. In the case of Wilko, we saw various reports that a CVA was being finalised which would lead to landlords receiving no rent for 3 years. This did not happen. In contrast to the spate of retail CVAs seen through 2020 and 2021, retail operators now appear to be struggling to make the CVA process work for them.
A number of factors may lie behind this. Companies which have already used restructuring or insolvency processes to get them through previous years are finding that the landscape to obtaining further funding has changed. Additional finance may be harder to come by and more expensive, and some companies are simply running out of the road necessary to enable them to complete a further restructuring process, whether or not such process includes a CVA. For some businesses, increased costs across the board may mean that it is not possible for those businesses to operate with sufficient profit to justify the costs of a further restructuring process.
The risks around a CVA also look different today than they did in 2020. Landlords, now very experienced in the "retail CVA", are better informed and better organised, supported by a high profile BPF campaign which put the CVA process under the spotlight and highlighted "red flag" clauses. Landlords banded together to challenge CVAs, creating a line of case law underlining the need to treat creditors fairly. The recent case of Re Mizen Design/Build Ltd not only found unfair prejudice around "vote swamping" by unaffected creditors but also highlighted the potential costs risk to CVA supervisors themselves if they are deemed to support an unfair practice rather than remaining neutral.
The wider market has also changed. Back in 2020, it was almost a given that properties subject to a CVA were likely to be overrented. The correction which has taken place since means that CVA proposals may have a higher hurdle to pass the "no worse off" test required. If the CVA is implemented, there is a higher risk that landlords today may terminate leases rather than accept the CVA terms, and take their chances in the market.
It is probably too early to announce the death of the retail CVA, but the pendulum does seem to be swinging back towards retail administrations for those businesses which find themselves unable to continue. Landlords will be split on whether a move back towards tenant administrations rather than CVAs is a positive or negative one. For our guide as to the key differences between the processes for landlords, click here, or for more information contact one of our specialists below.
