For some big retailers, coronavirus has been an opportunity to ‘strip the fat’ – what will that mean?

The Company Voluntary Arrangement was meant to help firms in dire straits with big debt problems. However, during coronavirus, some companies may be taking advantage of CVAs to streamline and strengthen their businesses, writes Chris Blackhurst

A quiet high street isn’t good for retailers (Getty)

The fashion retailer looked at me and smiled. I’d asked him how his business was faring in the pandemic.

“It’s grim,” he said. Then came the smile. “Actually, I should not say this, but Covid-19 is a lucky break for retailers like us. Of course it’s terrible what’s happened, but it’s enabled us to sort ourselves out, to regroup and to refocus – and all under the cover of the virus.”

He continued: “Before the virus we were in bad shape. The high street was being battered. We’d all got loads of sites that were useless, just haemorrhaging money. We wanted to shut them but couldn’t because every time we made a move people said we were going under and there was always a huge hoo-ha about the ones we were closing. Now, along comes coronavirus and we can use that as cover. We can do a CVA, get rid of the ones we don’t want, have stores that actually make money and concentrate on building up online. It could not have come at a better time.”

There will be many reading that who will regard his thesis, his chutzpah, as tasteless and insensitive. He did stress how sympathetic he was to the suffering the outbreak had caused. He’d been asked about business, so was talking business, and in pure business terms, as he also put it, Covid-19 was an “opportunity”.

Closures are large and would normally attract negative publicity and banner headlines. Now, they can blame Covid-19 and no one is upset, everyone understands

Everyone in his position, he maintained, chains with numerous outlets, is asking the same question of each other: “Have you done your CVA yet, have you got it under way?”

What he was highlighting is a war that is unfolding up and down the land, between businesses (not just retailers) that want to shed branches, and their landlords. The former have fallen upon a smart, lethal weapon, in the shape of the CVA or Company Voluntary Arrangement, under which 75 per cent by value of a company’s creditors agree to reschedule all or part of its debts.

The point about the CVA is that historically it was meant to apply to companies with serious debt issues that bring them to the edge of bankruptcy or that are actually insolvent, as a method of keeping them going. The principle is that the underlying business is OK and can survive, but that the firm is hampered by onerous debts. Redraw those, make them less demanding, so the theory goes, and the company can move on – little overall harm done.

The device is bracketed under insolvency law, and once the CVA is achieved, all sorts of remedies kick in, among them that property leases are terminated, employees can be made redundant without having to make redundancy payments, and the board and shareholders retain control.

What’s been occurring under Covid-19 is that businesses that are solvent and not in immediate danger of collapse but can claim the omens do not look encouraging, as virtually all those on the high street can, have been rushing to do CVAs, to close branches and to lay off staff, and to renegotiate their tenancy agreements and contracts. It was occurring pre-Covid, but the crisis has provided shelter and a get-out to those firms that were going to have to take some tough, controversial, public decisions. In some cases the earmarked branch closures are large and would normally attract negative publicity and banner headlines. Now, they can blame Covid-19 and no one is upset, everyone understands.

What was a device aimed at companies in genuine need has armed and emboldened companies seeking to lighten, or escape entirely, heavy tenancy agreements and fixed overheads. For businesses already struggling to cope with having old, increasingly unsuitable brick and mortar estates, versus the desire to boost online, the virus has become a chance to streamline and to strengthen their operations.

Every week the business news is full of well-known corporate names that have sought refuge in a CVA. Last week alone, Pizza Express, New Look, Yo!, Wasabi, Moss Bros, Select, Jigsaw, Hotter Shoes and Ann Summers were all linked to CVAs. Some of these and others were genuine, in the sense the company really is heading for the wall unless something is urgently done;  some, but not all.

More company voluntary arrangements have been struck so far this year than in the whole of 2019. Ostensibly, companies maintain they’ve been hit hard by Covid-19 and cannot see a positive future. It’s true they have suffered, but the virus is also enabling them to strip out the fat, something they’ve been wanting to do for years but have been too scared, to become lean again, and to carry on.

The losers in all this are the employees and landlords. The former may end up not being treated as well as they would otherwise have been. While the landlords find themselves participating in a vote in which they are joined by creditors that have not been affected so badly. Yet, as the CVA moves forward, the bulk of the deal’s impact falls heavily upon the property owners.

It’s hard to have total sympathy for the landlords – in many cases they have enjoyed upwards-only rent reviews and have turned a deaf ear to pleas for compassion as traditional high street operators have been struck by the downturn in traditional shopping, declines in footfall and the rise of digital. Nevertheless, they merit being listened to – the property owners also have investors and shareholders to placate, they’re also expected to make a commercial return, and there is no doubt companies have been quick to seize upon coronavirus to justify the CVA when they’re not in such bad shape, and certainly not on the brink of actual insolvency.

Greater clarity is required, along with increased understanding and empathy between the different parties: the retailers and others cannot simply play fast and loose with something that was not intended for this purpose, no one is being fooled.