CIGA Restructuring Plan - A Valuer's Perspective FRP

CIGA Restructuring Plan: A valuer’s perspective 10 plans in

Introduction

Valuation

CIGA Restructuring Plans as of August 2022

In June 2020 the Corporate Insolvency and Governance Act introduced a range of permanent measures aimed to relieve the burden on businesses both during and after the Covid-19 pandemic - amongst these measures was the Restructuring Plan (the “Plan”). The Restructuring Plan established a new tool for UK restructuring practitioners, drawing much of its substance from the pre-existing Part 26 CA06 scheme of arrangement (the “Scheme”) but differing via the existence of a “cross-class cram down” mechanism which enables the court to sanction a Plan even when creditor classes dissent, as long as certain conditions are met. In another departure from the Scheme, it is a prerequisite that the proposing company must demonstrate that it has encountered or is likely to encounter financial difficulties likely to affect its ability to carry on business as a going concern. The purpose of any restructuring is to resolve or mitigate the effect of a company’s financial difficulties, typically requiring compromise on behalf of creditors. The nature of the compromise and its effect on various classes of creditor are driven by the enterprise value of the company – and in situations where value breaks within the creditor stack, creditors either side of the value-break are likely to have differing perspectives on whether a proposed restructuring arrangement is in their best interests or not. It is typically junior secured or unsecured creditors that bear the brunt of compromise and thus a significant proportion of them may be inclined to vote against a proposal. The cross-class cram down mechanism aims to provide the Restructuring Plan with a practical solution to this, in that the Plan can be sanctioned by the court provided that (i) one “in the money” creditor class (most likely senior secured lenders) votes in favour, and (ii) that any dissenting creditor class is estimated to receive more under the Plan outcome than in the “relevant alternative”. In some cases junior creditors may be the approving class, potentially leading to situations where approval is used to cram down (or “cram up”) a more senior creditor class, impinging secured rights. The relevant alternative is defined as “whatever the court considers would be most likely to occur in relation to the company if the compromise of arrangement were not sanctioned”. Whilst the definition is intentionally broad, the relevant alternative is the fulcrum of a Restructuring Plan – understanding value under this counterfactual scenario is central to demonstrating a Plan’s fairness, and ultimately in determining the court’s willingness and ability to sanction it.

The valuation of alternative and illiquid investments – such as privately held companies – is complex and highly subjective. The depth of challenge and degree of subjectivity are exacerbated during times of economic uncertainty and further still when the subject company is directly facing operational or financial distress – an entry requirement for companies proposing a Plan. The overall valuation exercise that supports a Restructuring Plan is fundamentally comprised of three steps:

Virgin Atlantic Airlines: September 2020 First plan to be sanctioned Relevant alternative: Orderly wind-down Pizza Express: November 2020 First plan to involve a debt for equity swap Relevant alternative: Group-wide liquidation Deep Ocean: January 2021 First plan to utilise the cross-class cram down mechanism Relevant alternative: Administration or liquidation

Determining the relevant alternative

Valuation of the company under the relevant alternative

Comparison of creditor outcomes under the Plan and the relevant alternative

4 Gategroup: March 2021 First time a court decided whether a restructuring plan qualified as a civil/commercial or insolvency matter Relevant alternative: Insolvency 5 Premier Oil: March 2021 First example of a restructuring plan being utilised by a listed company Relevant alternative: : Group-wide liquidation 6 Smile Telecoms: March 2021 First plan to exclude shareholders and all bar one class of creditors Relevant alternative: Sale of assets from insolvency 7 Virgin Active: May 2021 First fully opposed cross-class cram down judgment and the first to include landlords as dissenting creditors Relevant alternative: Trading administration and accelerated sale Hurricane Energy: Declined in June 2021 First plan to be declined. Court found that shareholders would be better off if the plan wasn’t sanctioned Relevant alternative: Orderly wind-down 8 Amicus Finance: August 2021 First restructuring plan to be proposed by a mid-market company and first used as an exit from administration Relevant alternative: Liquidation 9 ED&F Man: March 2022 First plan to use the cross-class cram-down in a financial creditor class and to amend articles of association Relevant alternative: Partial liquidation, partial divisional share sales 10 Houst: July 2022 First plan to be sanctioned for an SME where the company was not already in a formal insolvency process Relevant alternative: Pre-pack administration

Soundings from the first 10

Following the sanctioning of the first 10 Restructuring Plans (see below) it is clear that the estimated value under the relevant alternative is a key consideration in judgements, and an area of potential dispute between creditor classes. A review of the cases so far reveals three key themes that stand out from a valuer’s perspective – the need for (i) debate, (ii) depth, and (iii) disclosure.

The purpose of any restructuring is to resolve or mitigate the effect of a

company’s financial difficulties, typically requiring compromise on behalf of creditors. Chad Griffin Restructuring Advisory

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