After a sharp rise in May, it came as little surprise to see corporate insolvency figures continue their march upwards. A total of 2,163 registered companies entered an insolvency proceeding in June 2023: the second highest figure since January 2019 and 40% higher than the equivalent for June 2022.
Retail continues to be one of the hardest hit sectors. Pressures on the high-street pre-date the pandemic – the years following the global financial crisis saw an almost constant procession of familiar high-street retailers hit the headlines as they struggled through various attempts at restructuring, in many cases finally resulting in an undignified demise. It is an industry with complex market drivers, including challenges resulting from the pandemic (such as changes in working practices resulting in less footfall in larger towns and cities, and a growth in home delivery), supply chain disruption (including supplier insolvency), the role of AI in automating decision making, and pressures to become more sustainable and provide more transparency around supply chains. Staffing pressures (both recruitment and retention) as well as inflation both remain a challenge for retailers, the latter increasing operational costs which cannot always be easily passed on to consumers, whilst also potentially dampening demand. Retailer difficulties are only likely to intensify now that the era of cheap debt has come to an end.
With interest rates looking likely to increase further, refinancing is not to be embarked upon lightly, and can be particularly difficult for retailers given uncertain trading prospects. With conventional lenders wary of getting their fingers burned, struggling retailers may be driven into the arms of “special situations” lenders. Discount retailer Wilko, for instance, secured a £40m two-year asset-back credit facility from Hilco in January this year which it positioned as part of a broader package of “necessary changes” that included changes to senior leadership. However, this may be more a stopgap than a solution, with such finance likely to come at a premium. New Look completed a series of restructurings in 2021, and is now understood to have engaged Deloitte to assist it with refinancing options for its £100m term loan which matures in June 2024.
So, what restructuring tools are available to distressed retailers? The UK has a variety of options, each with its own advantages and disadvantages. Those must be weighed carefully by a retailer, together with its financial and legal advisors, whilst understanding that they will not be panacea for all ills – in the retail sector, rarely are the issues faced resolved by a solely financial restructuring. Assessing options well in advance of any anticipated crunch point is likely to mean more options are available and provides more time in which to implement the chosen plan.
Company voluntary arrangements (CVAs) have been the standard method of managing bricks-and-mortar retail restructuring since the late 2000s. An arrangement between the retailer and its unsecured creditors that reduces liabilities, the CVA offers the ability to jettison underperforming stores and reduce rents, or adopt alternative models such as turnover rent. Latest reports indicate that Wilko intends to launch a CVA to reduce (and in some cases wipe out entirely) rental liabilities on 250 of its 400 store leases for the next three years. CVAs are conducted out of court (save for any creditor challenges) and outside of an insolvency process, relatively quickly and relatively cheaply, with control of the business remaining with existing management. Crucially a CVA binds all unsecured creditors of the company if approved by the applicable thresholds. But for all their advantages, history shows that for the majority of distressed retailers a CVA alone is not sufficient to turn around fortunes because it does not address the underlying failings of the business.
Restructuring plans were introduced as part of the 2020 insolvency reforms during the early days of the pandemic. The restructuring plan was designed to provide the UK with a court based, flexible restructuring tool that enables the compromise of claims of all types of creditors (including secured creditors and preferred creditors, such as HMRC) and the cram down of dissenting creditors. But take up of the new process has been slower than expected. Some household names at the top end of the market have successfully launched such restructuring plans – a recent example being Prezzo – but such examples are few and far between. The relative novelty of the process (and resulting lack of certainty), as well as the degree of court involvement and the costs associated with launching such a plan have all put somewhat of a break on their use within the SME market.
The 2020 insolvency reforms also introduced a standalone moratorium, which might be used by a retailer to give a breathing space before implementing a wider restructuring, but in practice it also has not been extensively used. Concerns include its short duration (initially 20 business days, although it may be extended), the lack of protection from certain creditors (most importantly, banks) and potential adverse publicity. What is clear – and is supported by the legislation – is that the moratorium can only be used where it is likely to result in the rescue of the company as a going concern: essentially a more substantive restructuring solution must already be in the pipeline.
Where a retailer’s issues are more severe, and a restructuring in the hands of current management is not viable, administration is the most likely outcome. In this context, it is common for a “pre-pack” sale to be negotiated before appointment of the administrator, and then executed immediately after appointment. While this often offers the best outcome for the business and employees (enabling stores to keep trading under the new ownership), suppliers and unsecured creditors will find themselves significantly out of pocket – as seen recently in the pre-pack sales of Party Pieces and Hunter Boots. Pre-packs can be controversial and damaging to a brand, particularly where, as is often the case, the purchaser is linked to existing management. Purchasers can cherry-pick the assets which they take on, and shed the liabilities of the insolvent entity. In any event, a pre-pack sale will only be possible where there is both some value left in the business and a buyer with the appetite to take on the business and inject further funding to turn it around.
The long-term survival of a distressed retailer depends on its ability to solve its underlying business issues. Addressing those can be a complex process, requiring the retailer to look to restructure for the future market, not what it was. The necessary restructuring tools are available to facilitate that process, but there must be a convincing narrative on future value to enable the retailer to sell its plan to stakeholders.
This article was first published in Accountancy Daily and can be accessed here.