New restructuring law is a step forward
Commercial landlords in the UK are angry about gym chain Virgin Active’s restructuring plan, and with good reason. Many of them have lost out heavily, while senior secured creditors got away with little more than an amend and extend.
But they are also angry about the precedent it sets. Virgin Active is the first company to use the “cross-class cramdown” feature of the new UK restructuring law, signed last year, to stiff its landlords.
This is a tool with awesome potential — particularly for borrowers and their advisors. One restructuring banker said last year, before the tool had been used, that it could prove to be a “jack-knife or a chainsaw”. From the Virgin landlords’ perspective, the chainsaw designation seems most appropriate.
But the question for any creditor has to be: what’s the alternative?
Most UK high street brands have cut their liability costs through a company voluntary arrangement (CVA) — a process which turns landlords against one another, but leaves secured creditors untouched.
These are quicker and easier than full court-approved debt restructurings, but they virtually guarantee that landlords, not wholesale creditors, bear all of the pain. They can be challenged in court, but not easily — this week, a judge shot down an attempt by New Look’s landlords to stall its CVA.
Following Virgin, more companies will turn to the new law rather than using CVAs. This will hurt landlords, but it will share the pain of debt restructuring across all creditor classes, which ought to mean better recoveries. It also increases the chances that struggling firms will do one restructuring and bounce back, rather than entering multiple rounds of CVAs which do not tackle wholesale debt.
It might feel brutal in the moment, but longer term, the new restructuring law is a good thing.