Posted: 20 Jan, 2022
On 11th January TMA UK was delighted to open the 2022 event calendar with the ever-popular Annual Turnaround Review / Preview, kindly sponsored by FRP and Dechert LLP. This year, our panel included experts in corporate restructuring, rail, and clean energy technology, with each panellist reflecting on the past year and sharing their thoughts on what’s in store for 2022.
Paul Davies, TMA UK President and Partner at James Cowper Kreston, opened the webinar and welcomed Ian Corfield, Partner at FRP, who acted as moderator. To kick off, Ian handed over to Kay Morley who shared some reflections on how the new restructuring plan was used in 2021 and what was learnt from the first cases.
Kay Morley – The New Restructuring Plan
Kay Morley, a partner in Dechert’s Global Financial Restructuring Group, started by reflecting on the case of Virgin Active, which was the first use of the new restructuring plan as an alternative to a ‘landlord CVA’. In the case of Virgin Active, the landlords, who were put into five separate classes for the purposes of voting on the plan, sought to challenge the plan on a number of different bases.
First, the landlords argued that there could have been an alternative restructuring plan whereby, had Virgin Active engaged with them earlier, a different outcome could have been achieved to the benefit of the company’s landlords and other unsecured creditors. In response to this challenge, the Court essentially concluded that it was not the role of the court to consider what an alternative restructuring plan could have looked like, and that they could only consider the plan before them. This decision, Kay said, highlights the fact that those creditors (and other stakeholders), who do not participate in the negotiation of any given restructuring proposal will typically need to move quickly once they know that a plan (or scheme) is being launched following the issue of a practice statement letter.
The landlords also sought to challenge the company’s valuation evidence and were successful in obtaining further disclosure from the company on matters relating to the categorisations of the various leasehold properties and consequentially, the different treatment of the landlords pursuant to the proposed plan. However, with the benefit of further disclosure, the landlords ultimately failed to present alternative valuation evidence to rebut the company’s evidence that value broke in the senior secured debt. This meant that when it came to imposing a cross-class cram down on five classes of dissenting creditors, the court was prepared to do so relatively easily, given that the Court was satisfied that those creditors being compromised by the plan were ‘no worse off’ than they would be in the relevant alternative of administration.
In her closing thoughts on the case, Kay observed that the case was helpful in providing further insight as to the approach of the English Court where there is a challenge to a restructuring plan and in particular, where there is challenge as to value and the ‘relevant alternative’. In this regard, the English Court has provided clear guidance that it will not permit the utility of restructuring plans to be undermined by protracted disputes.
Finally, Kay shared her thoughts on the case of Amicus Finance, a property finance company whose plan was the first to be proposed by an administrator. This case, she said, shows that the restructuring plan can, in the right circumstances, provide administrators with an alternative to a CVA, as well as providing a new means of achieving a rescue of a company on a going concern basis. Accordingly, going forward, it is likely that we will see more mid-market restructuring plans in the market, but only where the costs of the proceeding justify the proposed outcome.
Rufus Boyd and Paul Hirst – Developments in the UK Rail Sector
Rufus Boyd, Programme Director of Passenger and Freight Services in the Great British Rail Transition Team, started by summarising the developments happening in the UK rail sector, which he said originated from a review conducted by Keith Williams over two years ago. The review, which provided the basis for a government white paper, raised a number of issues with the UK rail sector:
- That passenger experience was far short of what was needed to build sustainable passenger trust in the system.
- That the rail sector was hampered by unclear accountabilities, which was demonstrated in a ‘shambolic’ May 2018 timetable change.
- That the business model for franchising of rail services was unstable and the private sector had a number of high-profile business failures.
To address these problems, Keith Williams said a number of significant changes were needed:
- To create for a guiding mind for rail - subsequently named ‘Great British Railways’ (GBR).
- To change contract arrangements, most notably to pass revenue risk from the private sector to the state.
- As part of ownership of the customer moving to GBR, a significant transformation of the retail model away from traditional station vending and paper tickets towards digital.
With these changes now well underway, Rufus sees this plan as a significant roll back from the 1993-95 settlement that led to a fragmented and liberalised rail sector. He said that while the new plan doesn’t seek to move away from private sector contribution, it does seek to roll back on the fragmentation that has developed in the rail sector. In his closing thoughts, Rufus said he thinks this a “once in a generation opportunity” to address problems with the sector and he is excited to see the changes taking effect.
Paul Hirst, Head of the Transport Sector Group at Addleshaw Goddard, echoed Rufus’ enthusiasm for the reforms, but also said that with such high expectations for the plan to deliver, there are a few key points that need to be addressed. First, that primary legislation is needed to set up Great British Railways and set out its powers, duties and responsibilities. Second, that because this a new structure, it will be important to get set clear governance and accountability structures, particularly to show that GBR can take impartial decisions when granting capacity. Third, that moving revenue risk is a big change and it will be important to ensure that the operators’ expertise in passenger management is retained.
David Sanders – The Clean Energy Sector’s Winners and Losers
David Sanders, a partner in the Energy Transition team at PA Consulting, focussed his sector overview on transport, buildings and industry – and how they are moving towards clean energy solutions.
Transport – Responsible for over a quarter of the UK’s carbon emissions, the government has decided that sales of new petrol and diesel cars are to end in the UK by 2030. This, David said, will have a number of effects. First, that EV charging infrastructure will need to be improved. However, he also said that EV charging infrastructure won’t become profitable until electric cars become more widespread as utilisation of the charge points will be low. David said the petrol station market will face increasing challenges, as many EV owners will choose to charge at home or at their destination. However, David thinks the hardest hit will be the auto supply chain, due to the fact that electric cars need fewer parts and maintenance mostly relates to software and batteries.
Buildings – As these are another major source of carbon emissions in the UK, the government has legislated to ban the installation of gas and oil boilers in new homes from 2025, encouraging alternatives such as heat pumps or hydrogen boilers. David said that the big winners here are likely to be the heat pump manufacturers and the losers will be natural gas suppliers and gas infrastructure suppliers. He said that while some of the gas pipelines might be converted to hydrogen, there’s also a big risk of stranded assets for gas companies.
Industry – To tackle emissions in industry, the government has set ambitious targets to become a world-leading hydrogen economy by 2030. To reach net zero, clean hydrogen is being seen as crucial to decarbonise certain hard-to-decarbonise sectors. The industries that are most likely to embrace clean hydrogen include the steel industry, the refining sector and the fertilising sector.
Ian Corfield – A review of the 2021 turnaround landscape and look ahead to 2022
Closing off the webinar, Ian shared his thoughts on the 2021 turnaround landscape, saying that the year seemed to defy gravity with abnormally low corporate distress and failure rates. Logically, Ian thinks the restructuring and turnaround market should see more failures in 2022 but when these will start to show is still unclear. But with government support at an end, spiralling inflation, labour shortages, pay increases and supply chain disruption, Ian said 2022 is set to be a difficult environment for businesses to thrive in. The challenge for the turnaround industry, as always, will be encouraging businesses to seek early advice but Ian said that by the time next year’s TMA review comes around he thinks we’ll be reflecting on a busy year for the profession.
To view the full recording of the webinar please click here: Passcode: 4mt.Z*Ix
Thank you to our panellists for sharing their excellent insights on an interesting year for business, as well as their predictions for the year to come. We hope you’ll join us for more TMA events in 2022, many of which will be in person. Visit the TMA UK website events page to see what’s coming up.
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