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Earlier this month, House of Fraser joined a growing list of British retailers and restaurant chains turning to a Company Voluntary Arrangement (CVA) to manage their debts.
A CVA is a type of insolvency process that allows businesses to pay back unsecured debts on favourable terms over a fixed period, usually 5 years.
A number of high profile retailers and restaurant chains have agreed CVAs in 2018, including Byron, Jamie’s Italian, Prezzo, Mothercare, Carpetright, Carluccio’s and New Look.
In line with CVA rules, House of Fraser needs 75% of its unsecured creditors to agree to their rescue plan. A vote will take place on 22 June 2018.
The department store agreed to sell a 51% stare in the business to the Chinese owner of Hamley’s, but this sale is conditional on the CVA and restructuring plan being approved.
A CVA is one way that a business can determine it’s lease obligations so they can leave the premises. Since House of Fraser typically has long leases on its stores, it is proposing to close 31 of its 59 stores in the UK.
The key advantage of a CVA is that the directors can stay in control of a company.
There is also no obligation to tell customers, so a CVA can be kept relatively quiet, and directors are not routinely investigated as part of a CVA.
There are some drawbacks to a CVA though. It will affect a company’s credit rating, which makes borrowing more expensive and might make it tougher to operate in the future.
It also ties a company into a long payback schedule to meet creditor obligations.
For retailers and chain stores, a CVA can result in reduced rents. Landlords are not happy about this.
Many landlords have argued that, of all the creditors, they take the biggest hit when a company agrees a CVA.
A CVA can also irk other high street businesses. If a town centre retailer applies for a CVA and gets a rent reduction, neighbouring businesses could lose out.
Marks and Spencer and Next have both indicated that they will be speaking to landlords about rent reductions, because many of their competitors have had theirs cut. This will further damage landlords revenue.
For some businesses, there is a nagging sense that CVAs are being used to gain an unfair commercial advantage.