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Red Flag Alert No Longer Recommends Extending Credit to Arcadia Group on Open Terms

Red Flag Alert No Longer Recommends Extending Credit to Arcadia Group on Open Terms

Company Voluntary Arrangements (CVAs) have been in the news again recently, with reports suggesting Sir Philip Green is considering using one to alleviate pressures on the Arcadia Group, a retail company that includes brands Top Shop, Burton, and Miss Selfridge. According to Sky News, the unveiling of the proposal could be imminent.

This wouldn’t be the first recent high-profile use of a CVA by a household brand. In the last 12 months, retailers such as Mothercare, Carpetright and New Look have all used the process as a way of strengthening their financial positions.

Whether or not Arcadia Group goes ahead with the rumoured CVA, it is unlikely to be the last time we see one used. If you are a supplier, it is important to know exactly what a CVA is, as well as how they can affect you.

Reminder: What is a Company Voluntary Arrangement?

A CVA is an agreement between a company struggling financially and its creditors in which the creditors agree to write off a portion of the debt owed to allow the company to escape financial trouble.

While this means creditors will lose out on money owed, it is considered a better option than forcing the company into administration, as this makes it much harder for creditors to recover debts.

Losing a large customer can be devastating for suppliers, so they may also be inclined to accept the deal due to the possibility of continuing to trade with a key buyer in the future. Creditors can, however, deploy other tactics to manage risk (here’s how) by requiring payment up front or introducing shorter payment terms.

For a CVA to pass it must be accepted by 75 per cent of creditors. Once passed, all creditors are legally bound to the terms of the agreement. This stands whether or not individual creditors agreed, voted, or were even aware the vote was happening.

The company then makes payments in accordance with the terms of the agreement. This is often via a monthly payment to the CVA supervisor or via proceeds raised from the sale of assets. The CVA supervisor will then make payments to individual creditors. It is important for the business to show creditors it has a viable way to make payments.

CVAs are used by companies which would be financially viable if it weren’t for the debt repayments they have to make. A business’s suitability for a CVA is assessed by the insolvency practitioner assigned to the case. Another benefit of a CVA is that directors can remain at the helm of the company. Interestingly, the number of CVAs increased between 2017 and 2018, with 386 versus 405.

Red Flag Alert Has Downgraded Arcadia Group’s Financial Health Rating

Arcadia Group is thought to be struggling, like many other high-street retailers, due to the effects of rising costs and declining sales brought about at least in part by competition from online retailers.

To get the 75 per cent creditor approval required to pass the rumoured CVA, Arcadia Group would need approval from major creditors that include landlords British Land and the PPF. It is also said to be discussing the deal with The Pensions Regulator (TPR), which according to Sky News sources will only support the CVA if it improves Arcadia’s ability to meet its pension obligations.

Red Flag Alert analyst Greg Connell explains the situation regarding pensions in more detail:

“Underfunded Pension Schemes can best be thought of as huge unsecured creditors, and since the Carillion crisis, The Pensions Regulator (TPR) has been highly focused on any disparity between the treatment of pension schemes and other stakeholders. For TPR to agree a reduction in contributions to the Arcadia scheme, the group will almost certainly have to offer mitigation in the form of security – the pledging of assets.”

Key to the agreement would be convincing creditors such as TPR, landlords, unsecured lenders and trade creditors that it is unlikely that the company can remain solvent without a CVA. Options would include cutting costs by paying landlords to exit unwanted outlets, and/or reducing payroll expenses.

On its behalf, Arcadia Group has not confirmed if it is pursuing a CVA. It has said it is exploring its options for restructuring.

The latest financials available are for 2017 and the key solvency, gearing and liquidity ratios suggest that the business should be able to stay solvent without entering into a CVA. However, we don’t have the 2018 financial statements, which won’t be available until the end of May, and we can only speculate over the extent of any deterioration. It seems clear that a CVA is being discussed, or threatened, and there is a possibility it will be accepted, which if true would likely lead to significant losses for unsecured creditors.

Because of this, Red Flag Alert downgraded the Arcadia Group’s flag rating to one red flag, meaning it no longer recommends suppliers extend credit to the group on open credit terms.

Red Flag Alert’s Greg Connell, had this to say on the decision:

“We think that the much rumoured CVA is gaining traction, and although a CVA in these circumstances might be considered a misuse of the process, we won’t really know the answer to that question until we see the 2018 accounts, and we believe Arcadia is planning on using a CVA before the filing date as a way to significantly reduce lease commitments, and possible pension contributions.

“They may not achieve the 75 per cent unsecured creditor approval threshold, and I’d be surprised if The Pensions Regulator and some of the landlords don’t object to a CVA, but it can’t be ruled out, and on that basis, we can’t recommend open credit terms."

Red Flag Alert’s Rating System Combines Expert Insight with In-Depth Data

Red Flag Alert’s data is particularly useful in situations like this because the in-depth financials are backed up by the judgements of professionals with years of experience in the industry.

Using the knowledge of a potential CVA, Red Flag experts were able to reduce the company’s rating, warning all those with access to the data that they no longer recommend dealing with the Arcadia Group – crucial information for businesses in Arcadia’s large supply chain.

To find out more about how this kind of insight can power your business and help you avoid risk, get in touch with Richard West on richard.west@redflagalert.com or 0344 412 6699 to set up a free consultation.

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