Image Credit: Eastgate Basildon
High street retail chain Arcadia has said this week that it is facing serious trouble with what it calls “significant liquidity issues”after an emergency meeting of its creditors was called on Monday.It claims its problems are not a unique phenomenon but instead are a result of the “malaise affecting the whole high street”. Arcadia, like many others, is feeling the effect of higher business rates, the rising national living wage and the fall in the value of the pound, which has put up the cost of imported goods,effecting trade performance both in the UK and abroad. However, with tough competition from the likes of Zara, Primark and H&M, as well as online pure plays such as ASOS, Pretty Little Thing and boohoo.com, the company’s ability to survive in such a saturated market is beginning to be called into question.
The answer, it believes, is a Company Voluntary Arrangement (CVA) a series of proposals to its creditors seeking to secure short term liquid injections to keep it afloat, in the hope trading will pickup in the third and fourth quarter of the year. But critics say it raises as many questions as it answers ,and fails to address key branding and operational problems in the company that demonstrate the Arcadia group’s long term inability to compete with the emergence of new on-line retailers. Arcadia, owned by Lady Tina Green, the wife of chairman Sir Philip Green, says that sales in its stores that have been open more than a year fell nine per cent in 2018-19. Earnings this year are expected to be £30m, compared with £219m two years ago. With fixed charges of around £100m a year,the group is facing the prospect of ending the year with its first loss of profit since 2002.
The question, therefore, is what does a CVA actually do, or what does Sir Phillip Green hope it will do? A CVA is a renegotiation of terms with a company’s creditors as part of an insolvency procedure.Arcadia’s CVA is complicated further due to the company’s unique structure that has evolved since 2002 to represent one of the worlds most exquisite specimens of corporate tax avoidance. (Please note Sir Phillip I have said avoidance not evasion, please do not pursue litigation against Nouse.) The first problem Arcadia’s CVA possess is that there are not one, but seven agreements relating to different parts of the group. In theory, if one CVA fails, only one part of the company would go into liquidation, the rest would carry on trading. In practice, Arcadia says that the companies are so interlinked that the whole group is unlikely to survive without all seven CVA's being approved. Documents obtained by the Guardian show that the CVA’s propose the closure of 23 stores, the re-negotiation of rents on 194 further stores, increasing net pension contributions over three years, an immediate liquid injection of £50 mil-lion and giving current landlords a 20 per cent stake in Arcadia in the event that the retail chain has to be sold.
However, what would this actually solve? Arcadia claims that its largest single issue is its fixed annual rent of £170m of high street retail outlets and it estimates the current leases are “over-rented” by 30 percent on average across the portfolio.But most financial analysts believe that this long-term fixed cost has already been in decline for Arcadia for the last three years.Richard Hyman, an independent retail consultant says Arcadia has been shrinking for years, closing stores as leases expire, and he said more were expected to close in the next two years for the same reason. Therefore, Arcadia’s proposal of closing 23 stores, just 4 percent of its portfolio seems of little significance to Arcadia as long term problems and the closure of such stores seems hardly likely to make a significant impact to the company’s long term survival. In order for the CVA's to be approved 75 per cent of creditors must agree to the proposals, without this approval the company will go into liquidation. In most CVA’s the creditors are usually banks or pension funds, so the landlords find themselves out voted and their rental income cut. However, in the case of Arcadia, most of the seven CVAs are linked to the company’s portfolio of properties and therefore it will be the landlords of Arcadia’s retail outlets that will ultimately decide whether or not to go ahead with the proposals.
PJT, the investment bank negotiating with Arcadia on behalf of a group of landlords, said in a statement: “there have been substantial improvements made to the CVA...which benefit all landlords, but there are still areas that need further clarity.” Arcadia is only one of several major high street retailers in re-cent months to be feeling the ever-increasing effects of the decimation of the UK high street. Although it is not unique in facing the effects of higher business rates and the collapse in the value of the pound since 2016, the genesis of Arcadia’s decline can be traced all the way back to 2005 when Sir Phil-lip Green banked £1.2bn in corporate profit after awarding himself the largest pay cheque in British corporate history. The pay out of such a monumental corporate dividend has ever since damaged the retail group’s ability to invest in its capital assets and maintain such a broad property portfolio of high street outlet.
Sir Philip’s proposed CVA's therefore offer a short term solution to Arcadia’s liquidity issues,however ultimately they fail to ad-dress more entrenched long-term declines in the company’s consumer demand. The Arcadia group’s future now, more than ever, seems to be in question. However, our sympathies lie with Arcadia’s 18 thousand staff,the people whose livelihoods are at risk in this stand-off. It is clearly possible that Green could choose to bring down the roof on Arcadia and seeing out his days in Monaco.