The retail world continues to reel from COVID-related restrictions, as enforced consumer hibernation from the high street extends into the first quarter of 2021.
While the next generation of retail will not fully form for some time due to the likely stop-start nature of industry recovery efforts this year, there remain many advocates of the positive role that bricks and mortar can play in an omnichannel strategy moving forward.
In the immediate term though, to reach the realms of realizing future transformation efforts for the “new normal” and beyond, liquidity constraints and working capital represent the closest crocodiles.
The property portfolios of retail groups of all sizes have swiftly seen the benefits of physical connection, geographic convenience, and personal customer experience buried by monumental financial millstones prohibiting an accelerated emergence from crisis management and a genuine existential threat to survival.
Show rigor in rent reviews
Acting now to restructure commercial property liabilities can deliver protection from the medium-term downside that we are likely to see during the continued uncertainty throughout 2021, as vaccine programs battle with virus mutations and consumers decide whether to take tentative steps to return to life as we knew it.
There are multiple ways to explore a property restructuring procedure that can help achieve the settlement of debts to landlords and renegotiate terms for the immediate future, presenting a strong chance of trading survival while the storm continues to be weathered. These include securing medium-term concessions in the shape of rent reductions or turnover rent structures for a period of up to three years whilst the market recovers.
There are also opportunities to implement longer-term rent reductions where properties are significantly over-rented and move to a monthly rent cycle, which can provide welcome working capital benefits. Rent arrears built up during pandemic lockdowns can also be targeted for compromise or secure structured arrangements can be negotiated to repay outstanding balances.
Routes to realizing property restructuring
As the examples above illustrate, there won’t be a one-size-fits-all solution, given the variety of property footprints and different rent agreements in place. The need for a tailored approach is much more likely and there are several routes to realizing the right strategy to employ, ensuring that the strategic objectives of the business are aligned with any cost-cutting exercise.
Direct negotiation with landlords may avoid the need to enter a formal restructuring process, but this can prove disruptive to business, hugely time-consuming, costly, and result in agreeing a wide range of terms that can be difficult to manage across a significant portfolio.
At the other end of the spectrum, administration and subsequent business and assets sale may be considered a step too far if positive projections for medium- to long-term business viability can be seen, if the immediate months can be safely navigated.
Between the two, the option to compromise historic and future creditor obligations by way of a binding CVA could prove a productive route forward. Here, scope is provided to potentially move to a more flexible rent arrangement in the short term, provided the requisite support is secured from creditors. There is also the opportunity to rebase parts of a property portfolio to market rents at the end of the CVA period.
How CVAs can accelerate positive property outcomes
A restructuring, if delivered through a CVA, can achieve a renegotiation of existing lease commitments with a range of potential positive outcomes:
- Pre-CVA rent liabilities: The CVA could propose a compromise payment to settle any outstanding rent liabilities that remain unpaid as a result of COVID-19. Compromising these liabilities – as opposed to deferring – will significantly strengthen the balance sheet of the ongoing business.
- Short-term rent obligations: In the post-pandemic environment it is likely that many sites will not be sustainable under current rental agreements. In the likely event that sites are over-rented, sites that would otherwise be marginal could remain with the business under revised agreements.
- Non-performing sites and onerous leases: If approved, a CVA will bind landlords to the proposals set out in the CVA document and this could include an effective surrender of sites that have been classified as non-core. The business will have no ongoing liability in relation to these sites with the exception of rates liabilities, which are currently frozen until the end of March 2021. Proposals would also typically include any sub-let or non-operational sites.
- Post-CVA rent obligations: To the extent that sites are over-rented, scope may exist to rebase certain rents at the end of the CVA concession period.
CVA terms have materially changed over the last six months and have been reshaped to provide businesses with a stable platform from which to recover from the significant impact of COVID-19. It is possible to move quickly and implement a CVA within just a 12-week period.
Offering a concession period of two to three years, depending on the requirements of the business and the forecast recovery timeframe, CVAs can cement structured breathing space and provide headroom for retail business leaders to proactively plan for business transformation and confidently seek new investment for the longer term.
Prior to the pandemic of 2020, some distressed retailers who turned to CVAs may have been accused of merely “kicking the can down the road”, taking advantage of a short-term solution that didn’t tackle or resolve the more complex underlying issues that their businesses faced.
Addressing the root causes of prior poor performance should still be central to a successful future strategy. This, of course, has been accelerated and magnified in 2020 by further seismic shifts in consumer behaviour and market trading conditions as a result of the pandemic.
A CVA will not be a course of action that any retailer will take lightly. However, as is the case for many businesses across all industries now, merely securing the opportunity to right-size, reimagine and reestablish their role for the future will rely heavily on re-basing costs and regaining control as quickly as they can this year.
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