Arcadia avoids administration

August 2019 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

August 2019 Issue

Arcadia Group, the fashion retail firm, has narrowly avoided administration after a group of the company’s creditors agreed to its controversial restructuring plan.

Under the terms of its plan, Arcadia, the parent company of Topshop, Topman, Burton, Dorothy Perkins, Miss Selfridge, Wallis and Evans, will now close 23 of its stores and see the rents of almost 200 others cut by up to 50 percent. The company will also make changes to the funding of its pension schemes.

Amid speculation it may enter administration, Arcadia put forward seven company voluntary arrangements (CVAs), all of which were approved by the required majority of creditors, including its pension trustees, suppliers and landlords. “We are extremely grateful to our creditors for supporting these proposals,” said Ian Grabiner, chief executive of Arcadia. “The future of Arcadia, our thousands of colleagues, and our extensive supplier base is now on a much firmer footing. From today, with the right structure in place to reduce our cost base and create a stable financial platform for the group, we can execute our business turnaround plan to drive growth through our digital and wholesale channels, while ensuring our store portfolio remains at the heart of our customer offer. I am confident about the future of Arcadia and our ability to provide our customers with the very best multichannel experience, deliver the fashion trends that they demand, and ultimately inspire a renewed loyalty to our brands that will support the long-term growth of our business.”

Shopping centre owner Intu, which counts Arcadia as a tenant in 35 of its stores, refused to accept rent reductions of 25 to 50 percent. The Crown Estate, Aviva, British Land and Hammerson were among those who voted in favour of the CVA. A spokesperson for The Crown Estate said: “While we have voted in favour, we have done so to secure our ability to take control where we feel that a better offer can be delivered for our destinations. This may include re-letting our spaces to new retailers who are more aligned with our ongoing commitment to creating great places for local communities.”

Initially, Arcadia put forward a deal which would also have resulted in 23 of the company’s 570 stores closing with another 25 earmarked to shut in future. But landlords rejected this proposal due to the level of suggested rent cuts, which were between 30 and 70 percent across 194 stores.

A group of property companies in the US have filed a legal challenge against Arcadia’s plan, however. As part of the company’s restructuring, its US subsidiary, Arcadia USA, has been pushed into administration. A group of US landlords have accused Arcadia of engaging in a “convoluted scheme” which deprives them of their “bargained-for contractual rights” by using the UK CVA process to settle its debts. Under the CVA scheme all 11 of Topshop’s stores in the US will close. The landlords’ filing at a bankruptcy court in New York accuses Arcadia of “manipulating and exploiting a private, little-used out-of-court process in the UK”.

Real estate investment fund Vornado, which owns Topshop’s two New York stores, and several of Arcadia’s other landlords, including Caruso, Simon Group and Canadian real estate group Brookfield, are part of the legal challenge. The papers opposing the administration were filed in the US on 4 June, two days before the first creditors’ vote on the CVA in the UK, and were accompanied by a letter requesting that Deloitte consider adjourning that vote.

A rising number of troubled retailers in the UK are opting to carry out CVAs as trading on the High Street becomes increasingly challenging. Amid subdued consumer spending, rising labour costs and business property taxes and growing online competition, CVAs are becoming more commonplace. Although they are no guarantee of success, they are a versatile tool. A firm applying for a CVA can carry on trading and restructure to improve overall profitability, improve cash flow and increase working capital. Perhaps most crucially, a CVA allows companies to avoid administration.

Richard Summerfield