CVAs: A few things you should know

20 July, 2018
by: Cripps Pemberton Greenish

You might have seen the term “CVA” hitting the headlines recently, with a flock of well known high street names the likes of House of Fraser and Mothercare amongst companies recently undergoing the CVA procedure. But what does the term “CVA” actually mean?

CVAs- In brief

A Company Voluntary Arrangement, or CVA, enables a company in financial difficulty to enter into a compromise with its creditors. It is usually a “last resort” for companies in dire financial straits, where the likely alternative would be to enter into administration.

A CVA is a legally binding agreement, allowing the company to re-negotiate the terms of its debts with creditors. In order to proceed, 75% (by value) of the creditors must vote in favour of the agreement. Those voting in favour must include at least 50% (by value) of the company’s unconnected creditors (those who are not directors and shadow directors or their associates).

As long as the required majority vote in favour, the CVA will bind all creditors entitled to vote. There will always be winners and losers in terms of those creditors who come off largely unscathed, and those who will feel the pinch.

The ‘casual dining crunch’

The number of restaurants in financial distress has rocketed by approximately 140% in the last six months, with middle market, or ‘casual dining’, chains being particularly badly affected.  Late 2017/early 2018 saw both Byron and Jamie’s Italian enter into CVAs. Prezzo and Carluccio’s followed swiftly in their wake.

“Why?”, I hear you ask There are many theories behind why CVAs are very much ‘in vogue’. Growth of online shopping, Brexit uncertainty, falling consumer confidence, rising labour costs, and long-term, inflexible leases are just a few reasons offered for why we are seeing a rise.

In the news- abuse of the system?

There have been increasing calls for the government to review the CVA structure. In particular, landlords and property owners have suggested that companies may be abusing the system to obtain cheaper rents and better lease terms. This process is known as ‘lease-stripping’.  

Where landlords become creditors they can sometimes be short-changed when it comes to the CVA process. With a significant proportion of properties in the ownership of insurers and pension funds, it is not just the landlords who may lose out under CVAs, but ordinary savers too.

Watch this space

The use of CVAs is becoming far more widespread in what is already a challenging retail market. There are no signs of this trend abating any time soon, so it will be interesting to watch how this story develops over the coming months.