Restructuring options for businesses in the retail and construction sectors

While overall insolvencies fell in number in 2017 compared with 2016, the last quarter of 2017 showed an increase compared with the previous quarters which had been stable.

In those insolvencies, the vast majority are voluntary liquidations, but there is a trend of retail businesses which are struggling turning to the Company Voluntary Arrangement restructuring option, often accompanied by a managed reduction in operations.

The huge market presence of online retailers together with the high cost of rent and business rates and concerns about pensions deficits, continue to threaten the retail sector in particular. In response to those concerns, a number of national retailers have turned to restructuring by a CVA. Collapsed BHS aimed for a CVA before it ended up in Liquidation, New Look is rumoured to be considering a CVA, and Toys R Us, known for their large stores in out of town locations, has recently entered a CVA.

A CVA is by no means an easy option for a company. Requiring the approval of 75% in value of its creditors, a company proposing an arrangement has to provide creditors with significant information and projections if it is intending to make payments from continuing to trade. Their main benefit is that the acceptance by 75% in value binds all creditors, and once approved, the company then gets a certain amount of breathing space to implement their strategy to return to more successful trading.

CVAs have had their fair share of criticism, with landlords in particular often vocal critics of proposals in which they are treated collectively or in categories without individual negotiation or negotiation by particular site. However, for a CVA to be successful, creditor engagement and support remains key. The implementation of the Insolvency Rules 2016, effective from April 2017, changed the way in which creditors vote on CVA proposals, aimed at increasing that engagement in all processes by making it easier for creditors to be involved. From the creditor perspective, this compares favourably with Administration, in which often at all there is no collective creditor process until well after a business has been sold and has re-emerged without its debts.

The food and drink sector is also affected by poor sales and expensive leasehold obligations, and is similarly turning to CVAs where restructuring is a possibility.

Three national chains often found in city centres and shopping malls; Jamie's Italian, Byron Burger and Fuel Juice Bars have recently proposed CVAs, all of which included downsizing operations.

While these companies are national brands, it is interesting to note that each is reducing its presence in the South West. Toys R Us will close a number of stores, including those in Exeter and Plymouth, and one of the two in Bristol, although its Cribbs Causeway store is expected to remain open. The Exeter branch of Jamie's Italian closed in 2017 with six other closures prior to the restructuring, and the Bristol and Bath branches are expected to close in due course, meaning the chain is leaving the region altogether. The Bristol branch of Byron Burger is on the list of expected closures, but the current indications are the  Exeter Branch will remain open. Fuel Juice Bars is continuing to trade in Plymouth.

The withdrawal by these big retailers from the region suggests less consumer activity here than in other parts of the country, but that is not borne out by other retailers who are investing in the region. The Exeter IKEA is scheduled for opening in 2018, Next, Frankie and Benny's and DFS, all new to North Devon, will be taking up new retail space at the Anchorwood Bank development in Barnstaple, and there will be a new Next Home store at Marsh Mills Gateway in Plymouth.

Retail is expected to remain a challenging sector, and while downsizing operations is indicative of that challenge, the fact that creditors appear to be open to restructuring by CVA suggests that this option will remain attractive to retailers where positive projections give creditors the confidence to support a proposal.

The construction industry, which was already one  of the sectors most affected by insolvency in 2017, is also likely to continue to have a number of businesses considering restructuring options in 2018. The construction sector cannot be mentioned without reference to Carillion, but it became apparent that Carillion was too insolvent for restructuring to be a possibility, ultimately ending up in compulsory liquidation. It is clear, given the limited to no return expected for unsecured creditors in that insolvency, that we can also expect to see the ripple effect of more restructurings and insolvencies in the construction sector.

It is less clear whether affected construction companies are also likely to turn to CVAs as their preferred restructuring option. Not all businesses will have the projections and work streams that will make a CVA attractive to creditors, and this is especially likely with those where the sole or main source of income was Carillion, unless replacement work is found quickly. Construction companies may also find that CVAs are less attractive due to the requirement to talk to creditors about their financial position and plans in order to gain the vital creditor support to result in an approved CVA proposal, particularly where such admissions could engage events of insolvency clauses in contracts, entitling the creditor to terminate those contracts. Such a step could worsen the company's position and directly impact on the ability to deliver future income likely to be required in any trading CVA.

It is probably more likely that construction companies will look to avoid a formal process in any restructuring if possible, or use a pre-packaged Administration and business sale, perhaps hoping to present creditors with a fait accompli and positioning any new business owner as ready and able to immediately fulfil outstanding contracts.

It remains to be seen how many future restructurings, rescues or insolvencies can be linked directly to Carillion's collapse.

Overall, the sectors which were at risk in 2017, including construction and retail, are likely to remain at risk in 2018 and a steady flow of restructuring is expected, both nationally and regionally. This presents opportunities for acquisitive businesses, and the responses to our own insolvent business and asset sale bulletin indicate that there is plenty of appetite for investment in the region.

This year should also bring some clarification as to the transitional arrangements for Brexit, although it remains to be seen whether that does anything in terms of market confidence. For now, as always, businesses in all sectors facing challenges and interested in restructuring options such as CVAs, should ensure they seek early advice as prompt intervention remains essential to maximise the prospect of a successful restructure or rescue and avoid terminal insolvency.

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