‘There’s going to be a lot of distress on the high street,’ Weil, Gotshal & Manges partner Adam Plainer told Legal Business last autumn in an extended assessment of the City restructuring outlook. Given that insolvency lawyers have been confidently – and wrongly – predicting a flood of work since the banking crisis, such claims generally attract some scepticism. Yet the forces battering the high street did indeed in 2018 send a string of familiar names to the corporate vultures.
This summer’s collapse of Gaucho Group, the owner of premium Argentinian steak purveyors Gaucho and Cau, became only the latest casualty, amid a malaise that has seen dining and retail stalwarts struggle with shifting consumer behaviour and rising overheads.
Against testing market conditions – despite a surprisingly resilient wider economy and a relative dearth of big-ticket restructuring situations – 2018 has been the year that restructuring counsel have had company voluntary arrangements (CVAs) as their bread and butter. Pinsent Masons is advising Gaucho and Hogan Lovells is acting for Deloitte as the company fell into administration in July after owner Equistone failed to secure a CVA in relation to the underperforming Cau chain.
In August, struggling DIY chain Homebase called in the increasingly prominent Kirkland & Ellis on a CVA which proposed closing 42 stores, putting 1,500 jobs at risk. Previously, a similar deal at Mothercare generated roles for Slaughter and May and Hogan Lovells, while Paul Hastings and Sidley Austin were deployed on a CVA for New Look.
The CVA is a form of restructuring allowing distressed companies to propose new repayment terms with creditors, being typically favoured for having lower costs than full administration and allowing boards and shareholders to retain control of the company. It is often deployed on the high street to help struggling companies renegotiate onerous rents with landlords.
Carl Allen of Eversheds Sutherland, which has advised on the recent administration of electronics retailer Maplin and the restructuring of Poundland, notes that CVAs, despite being available for more than 30 years, have only in recent years come to the fore. ‘The CVA has come to prominence recently because of the significant number of retail and dining businesses that have used it at the same time.’
How the equilibrium will settle is unclear. With retailers facing huge structural challenges, landlords may have to get used to a fundamentally changing outlook.
Peter Baldwin, partner at Ropes & Gray, picks up the theme: ‘Retail has been affected by internet shopping and the introduction of the national living wage. The dramatic shift in consumer behaviour has brought about the biggest increase in these situations, the impact of Deliveroo and Uber Eats, which provide food at thin margins and no tips, as well as the margin erosion occasioned by Amazon, makes it very difficult to survive.’
Such trends inevitably generate tensions between counsel for companies and those acting for landlords. A key development has seen a closely-watched legal challenge mounted by landlords to a CVA proposed by department store House of Fraser, which is being advised by Freshfields Bruckhaus Deringer, with Kirkland acting for bondholders (a subsequent £90m pre-pack sale of the department chain saw RPC mobilised in August to advise the acquirer, core client Sports Direct, with Clifford Chance (CC) acting for administrators EY).
The group of landlords represented by restructuring outfit Begbies Traynor and property agency JLL filed a petition in the Scottish courts challenging ‘alleged unfair prejudice against certain creditors as well as material irregularities in the implementation of the CVA’.
The terms in contention include existing shareholders of House of Fraser ‘receiving £70m of value whilst certain landlord creditors are shouldering the financial impact of the process’, [of the CVA]. The group argues the retail CVA process in the UK has become fundamentally flawed and says that ‘applying a 75% arbitrary discount to the value of landlords’ claims has no basis in law’.
Restructuring lawyers stress that future challenges like this will not be the death knell of CVAs, which can be a quick and cost-effective tool to prevent companies with a large number of leases having to resort to the more costly alternative of insolvency, but they are not a one-size-fits all approach.
Opinion is also divided on what has been dubbed ‘the Next clause’, an unusual provision put forward by the fashion retailer that would hand it rent reductions if neighbouring businesses achieved similar cuts via a CVA. The move has unsurprisingly provoked outrage in real estate circles and is viewed with bemusement by many hardened insolvency lawyers.
Richard Obank, restructuring veteran at DLA Piper, says: ‘You have to ask if the business will be a success in the long term. CVAs only work when creditors can see there is a clear turnaround plan with adequate funding and, where appropriate, when there is fresh blood on its board of directors to signal a move away from the past. Otherwise, you are just postponing the inevitable.’
Nevertheless, how the equilibrium will ultimately settle on this is unclear. With retailers facing huge structural challenges in online retail and margins being pressed from many directions, landlords may have to get used to a fundamentally changing outlook. All eyes will be on whether future CVAs are deemed to push the envelope and provoke legal challenges.
And bear in mind that these series of restructurings have emerged while interest rates remain near record lows, economies in Europe and the US are relatively stable and before any serious disruption from Brexit has hit the UK high street.
In the wider insolvency sphere, 2018 has already seen the collapse of construction group Carillion, generating substantive roles for Slaughters, CC, Freshfields, Dentons and Linklaters. As the ten-year anniversary of Lehman Brothers’ administration approaches, insolvency lawyers’ forecasts of economic turbulence are getting harder to dismiss by the day.