Fears over the future of embattled toy retailer Toys R Us continue to mount after its UK business announced it was to seek a Company Voluntary Arrangement (CVA) to handle a mounting debt crisis.
The company, which is thought to have made a trading loss for seven out of the past eight years, has announced plans to close a minimum of 26 stores in the UK, with a loss of 800 jobs.
Bosses have drawn up a CVA plan outlining proposals to restructure its debts in a way which will allow the company to continue trading. It will be put to creditors on December 21st.
The move confirms fears that the financial woes suffered by Toys R Us in the USA might blow across the Atlantic to the UK. The US and Canadian operation filed for bankruptcy earlier this year amidst its own debt problems.
Although the American arm is the global parent company, the Toys R Us exists as a distinct financial entity in the UK. A spokesman insisted the decision to seek a CVA was unrelated to the company’s bankruptcy in the US.
But once news emerged that Toys R Us had filed for Chapter 11, it was reported that UK suppliers were halting deliveries, understandably concerned about the ongoing viability of the company and the risk of not getting paid.
What does a CVA mean for suppliers?
A CVA is a recognised instrument for resolving company insolvency. In that sense, the fact that Toys R Us has started the CVA process confirms suppliers’ fears - that the company does not have the liquidity left in the business to pay its debts.
For all parties, a CVA can be regarded as the least intrusive way to resolve insolvency and settle debts. Without having to go through the protracted process of administration, or the legal dismantling and sharing of spoils that occurs in liquidation, a CVA is founded on the principle of compromise.
The aim is to find a way to satisfy creditors with a repayment plan that allows the insolvent company to continue trading.
For Toys R Us creditors attending the meeting on 21st December, the key is whether the proposed terms of the CVA are acceptable to their own financial requirements. In the spirit of compromise, creditors will usually have to accept a reduction in debt repayments spread out over a longer period of time, or else write off a portion of what is owed to them completely.