JJB Sports announced this morning that it averted Administration (bankruptcy) by pushing through a Company Voluntary Arrangement (CVA). While they have been around since the 1970s, CVAs are growing in popularity, which is very notable for landlord/tenant relations in Europe. The punchline is that they can keep alive a business that otherwise would/should go bust in this bankruptcy cycle - prolonging the inevitable. If we see many more of these in European retail, we could see the business cycle take meaningfully longer to recover when compared to the US.
What is a CVA?
A CVA is a contract between the insolvent business and creditors to repay some or all of their debts with future profits. It's an answer for those companies who don't want to go completely bankrupt and a solution for creditors to at least receive some of the money they are owed.
A CVA does not just consist of two sides coming up with an agreement to pay back money. It goes much deeper than that. To start with the CVA process, one must believe that their business can come back and be profitable, and come up with a convincing enough argument such that the creditors believe it. The managers and owners still remain in control of the company, but open up the strategic plan and allow the creditors in to make suggestions. A 75% approval rate is needed at the creditor level, and it must be fully vetted and endorsed by the country court.
Anyone who has been following our teams' collective work at Research Edge has heard us refer to this bankruptcy cycle as a game of Survivor. The last one to get voted off the island is going to come out on top as it relates to market share, and likely get the highest multiple along the way. The irony with these 'CVAs' is that they could prolong the inevitable (and prolong the pain) for European retailers.