In a sector that has been one of the most significantly impacted by the economic effects of Covid-19, how hotels emerge from lockdown is, understandably, at the forefront of all stakeholders’ minds.
While hotels are able to reopen from 4 July, the question of how quickly they are able to return to profitability given the myriad of operational issues that they will face is vexed. For some, a degree of financial restructuring will be inevitable.
One (of many) options, certainly for leased hotel structures, may be the implementation of a company voluntary arrangement (CVA). But do they leave landlord creditors worse off?
What are CVAs?
A CVA is a form of statutory compromise between a company and its unsecured creditors. It is an entirely flexible tool and there are very few constraints on what proposals can be put to creditors. They also have a distinct advantage over bilateral negotiations in that 75% of creditors voting in favour of the proposal can bind any dissenting minority.
How do they work?
Directors prepare detailed proposals setting out how they intend the debts of the company to be rescheduled and circulate to creditors who then vote in favour or against the proposals. Creditors may also suggest modifications.
The proposals have to be supported by an insolvency practitioner who, if they are approved, will supervise the implementation of the CVA.
How can a CVA impact hotel owners?
A “landlord focused” CVA is likely to categorise properties/leases by reference to their performance and the terms to be applied to those leases will vary drastically. For the worst performing, there may be a significant reduction in rent with the intention that the lease will ultimately be surrendered in short order. For the better performing properties, changes may be as limited as moving from quarterly to monthly rental payments.
Often, landlords worst impacted by the proposals will be entitled to share in any upside should the business successfully return to profitability following the implementation of the CVA.
Why might they be opposed?
An issue regularly raised by landlords relates to the calculation of their vote. This often involves a heavy discount (up to 75%) on future rent due under the lease. The reason being that the rules relating to CVAs allow contingent claims (which include future rent) to be valued for £1, so the reduction takes into account this statutory starting point.
In addition, there may be concerns that the owners of the company are not taking any of the “pain” which is being solely borne by the landlords. The battle playing out in the press regarding the Travelodge CVA encapsulates some of these concerns although these are far from straightforward – not least because often shareholders will in fact be injecting further cash into the business as part of the proposal.
Do they work?
Statistics show that almost half of CVAs fail. To date this is often because debt restructuring is not sufficient to effect a long term change in the financial fortunes of the company and more fundamental operational turnaround is needed. This may not hold true for post-COVID CVAs.
What’s next for CVAs?
The CVA is likely to play a significant role for viable but financially struggling companies as we emerge from lockdown. Indeed the proposed insolvency reform, which introduces a new form of standalone moratorium, expressly provides for an extension of that moratorium while a CVA is pending – addressing one of the key concerns in relation to CVAs – that there is no protection from aggressive creditors during the period leading up to the CVA vote.
No doubt further challenges will be made on the grounds of unfair prejudice (as we have recently seen in relation to the Debenhams CVA) but where the alternative is a more terminal insolvency process, the CVA may well be a more attractive option for all stakeholders.
Nick Moser is a partner and Head of our UK Restructuring & Insolvency team at Taylor Wessing. Amy Patterson is a partner at Taylor Wessing