The BHS CVA is now in effect following a successful ‘yes’ vote on 23 March 2016 when 95% of creditors voted in favour of the proposals.
The BHS CVA is the latest in a long line of CVAs that have been successfully used to reduce the burden of onerous lease arrangements across large retail portfolios following the likes of Austin Reed and Country Casuals (where Squire Patton Boggs advised). For an in depth look at the advantages and disadvantages of retail CVAs please take a look at our previous blog on this topic: Too Much Space? Consider Downsizing
BHS has been a name on the UK high street for almost a century but has seen its profitability decline in recent years as it struggled to tackle the issues faced by all today’s high street retailers such as decreased footfall in the face of the rise of online shopping, out of town retail parks and the advent of multichannel retailing. Sir Philip Green’s exit from the group last year for the meagre consideration of £1 only served to underline the group’s woes and crystallised the markets’ view of BHS as a brand that was in trouble.
BHS’s new owners took a proactive approach to the issues faced by the group and engaged KPMG with a view to developing a rescue plan for the business. The BHS CVA is part of a wider turnaround plan and was specifically targeted at addressing the unsustainable rent bill which was a key threat to the survival of the business. The terms of many of its leases were agreed decades ago and so failed to take account of today’s difficult market conditions with rent levels becoming increasingly untenable.
The CVA proposals were made in relation to both BHS Limited and BHS Properties Limited and divided the group’s 164 properties into three main categories, based on the commercial viability and strategic importance of each site. Category 1 premises relate to profitable stores most importance to the business and the 77 landlords of these stores will not see any rent reductions but such rents will be paid monthly rather than quarterly for the next three years. The landlords of 21 Category 2 premises (those viable upon implementation of a rent reduction) have accepted a 25% monthly rent reduction and a further 26 a 50% monthly rent reduction. The remaining 40 Category 3 premises will receive an amount equivalent to 25% of the current monthly rents for a minimum period of ten months.
The rent cuts were made more palatable by the opportunity for landlords to reclaim their properties and some will undoubtedly take this option, but importantly, the Category 1 properties which are business critical are carved out of this option on the basis the rents on those stores remain untouched.
Whilst slashing the rent costs of the group’s store portfolio will undoubtedly improve BHS’s survival prospects in the short term, the group still needs to secure additional funding to continue to trade in the long term and continues to operate under the cloud of its pension scheme deficit which is believed to have a shortfall in excess of £500 million with negotiations with the Pensions’ Regulator ongoing. BHS has survived to fight another day through the support of its creditors and shareholders but the market will watch its progress with interest over the coming months.
CVAs remain a vital and relevant tool in the rescue culture arsenal, particularly in industries where large property portfolios are the greatest strain. The flexibility they provide makes CVAs an attractive option and in the current environment there does not look to be any sign of them falling out of favour anytime soon.
Squire Patton Boggs’ London office advised a large landlord in connection with the BHS CVA whilst our Leeds office acted for a supplier in relation to its concerns.