Hogan Lovells reflects on the impact of the landmark decision in respect of the Virgin Active restructuring in three inter-conditional Part 26A plans on 21 May 2021.
The Virgin Active restructuring plans represented the first fully contested cross class cram down for the new Part 26A process, since its introduction almost exactly one year ago. The plans saw five out of seven creditor classes in each of the plans subject to cram-down, delivering a comprehensive restructuring of its real estate liabilities as part of a plan that saw material new money injected by sponsors, and Lenders extending. DeepOcean and Smile Telecoms are the only other restructuring plans to successfully utilise the cram-down mechanism, both concerned structural debt and were not contested at sanction.
The seven creditor classes for each of the plan companies included: (i) the senior secured lenders; (ii) the UK landlords, categorised in classes A to E (based on traditional CVA structure); and (iii) a class of other general unsecured property creditors. As well as the changes to the senior facilities, the restructuring plans involve waivers and deferrals of rent arrears, reductions in rents and compromises of the claims of general property creditors. At the plan meetings, the secured lenders and the class A landlord creditors approved the plans but the other classes of landlord creditors (B through E) and the general property creditors dissented. The plan companies requested the Court to cram down the dissenting classes to sanction the restructuring plans.
An ad hoc group of four landlords opposed the restructuring plans at both the convening and sanction hearings. Arguments were numerous, including assertions that the “no worse off” test had not been satisfied in the absence of market testing and/or appropriate valuation, and/or that the Court should not use its discretion to sanction the plans because the treatment of the landlords under the plans was not just and equitable particularly by reference to the adequacy of timely sharing of information and efforts at pursuing an alternative. These arguments ultimately failed on the facts of this case.
The judgement of Snowden J on the Virgin Active restructuring plans has now become the leading authority on cram downs. It has provided welcome guidance on how the Court will assess the relevant alternative for the “no worse off” test. In particular, it clarified that there is no absolute obligation for the relevant alternative to be underpinned by a market testing process but that the merits and feasibility of market testing must be assessed on a case by case basis. Guidance is also given as to valuation, and it seems creditors will need to adduce their own independent valuation evidence to successfully challenge the company (even if this has to be produced based on less than optimal information and timeframes). Snowden J’s judgement also sets out the factors the Court will consider when exercising its discretion to sanction plans where creditor classes have dissented. The judgement was robust in emphasising that it is for the “in the money” creditors to determine how to divide up any value or potential future benefits following the restructuring (i.e. the restructuring surplus), and little if any weight is likely to be placed on votes of ‘out of the money’ dissenting creditor classes. This point might compare with the recent decisions on the New Look and Regis CVAs which flagged that the level of compromise suffered by a group of creditors under a CVA who are carrying a vote to impair dissenting creditors will be scrutinised closely by the Court and a lack of sufficient for compromise could amount to an unfair prejudice issue). Lastly, whilst there was complaint that the timetable may have been deliberately engineered or aggressive to jam an impairment on dissenting creditors, it was ultimately not substantiated on the facts. Virgin Active had actively engaged with landlords throughout the COVID pandemic, and moved quickly to re-model its business plans and re-engage again following the Kent variant and “lockdown three” which dominated its business in Q1 2021.
This may pave the way for more aggressive treatment of out of the money creditors by plan companies going forwards. However, it is a case decided very much on its facts and investors should be wary of extrapolating too much from this successful case and backing plans unlikely to succeed. Considerations are materially different where compromised creditors might be in the money, there are other preferable and deliverable alternatives available, and/or timetables could have afforded market testing or lengthier window or opportunity for valuation. We have just seen the Court refuse to sanction the Hurricane Energy restructuring plan because the judge was not convinced that the company’s relevant alternative of a controlled wind down was the most likely outcome if the plan was not sanctioned. Zacaroli J in that case was of the view that there was a realistic prospect of finding a solution to the shortfall to the bondholders. Whilst Hurricane was also decided on its facts, it shows the Court is looking closely at the company’s choice of relevant alternative, particularly where the company’s liquidity runway gives time for options to be explored. Well advised debtors and investors will be wary of plans launched from a more engineered platform, with delays in creditor engagement or pursuit of alternatives in the hope of achieving more aggressive compromise.
Hogan Lovells (Tom Astle and James Maltby) acted for the senior secured lenders in relation to the Virgin Active restructuring scheme. The firm also advised the senior lenders in relation to the Smile Telecom restructuring plan, the successful challenge to the Regis CVA, and challengers in relation to the NCP restructuring plan.
Guest post written by Lucy Xu, Senior Associate at Hogan Lovells International LLP.
To learn more about the Virgin Active restructuring plan as well as news, commentary and analysis on issues affecting the high-yield, stressed and distressed markets in EMEA visit our EMEA Core Credit product page.