Virgin Atlantic Airways Ltd

JurisdictionEngland & Wales
JudgeMr Justice Snowden
Judgment Date04 September 2020
Neutral Citation[2020] EWHC 2376 (Ch)
CourtChancery Division
Docket NumberCase No: CR-2020-003222
Date04 September 2020
In the Matter of Virgin Atlantic Airways Limited
In the Matter of Part 26A of the Companies Act 2006

[2020] EWHC 2376 (Ch)

Before:

Mr Justice Snowden

Case No: CR-2020-003222

IN THE HIGH COURT OF JUSTICE

BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES

COMPANIES COURT (ChD)

Royal Courts of Justice

Rolls Building

Fetter Lane

London, EC4A 1NL

David Allison QC, Ryan Perkins and Lottie Pyper (instructed by Allen & Overy LLP) for the Company

Hearing date: 2 September 2020

Approved Judgment

Mr Justice Snowden Mr Justice Snowden
1

At the conclusion of a hearing conducted remotely on 2 September 2020 I indicated that I would sanction a restructuring plan (the “Restructuring Plan”) between Virgin Atlantic Airways Limited (the “Company”) and four classes of its creditors (the “Plan Creditors”). It was the first such restructuring plan to come before the court under the new provisions of Part 26A of the Companies Act 2006 (“Part 26A” and the “CA 2006”) and it had the support of the overwhelming majority of the Plan Creditors. I indicated that I would give my reasons in writing, which I now do.

Background

2

The Company operates a major international airline based in the UK and is a member of the Virgin Atlantic Group of companies (the “Group”). The Company is indirectly owned by Virgin Atlantic Limited (“VAL”) which in turn is owned as to 51% by Virgin Investments Limited (“VIL”) and 49% by Delta Air Lines, Inc (“Delta”). The ultimate beneficial owner of VIL is Sir Richard Branson.

3

The Company's airline business is fundamentally sound, but its financial position has been severely affected by the ongoing COVID-19 pandemic, which has caused an unprecedented reduction in passenger numbers and disruption to the global aviation industry. As a result, the Company is now undergoing a liquidity crisis. Without a restructuring and an injection of new money, it is projected that the Company's cash flow would drop to a critical level by the week commencing 21 September 2020. This would trigger the rights of certain bondholders under a securitisation to commence an enforcement process over the Company's valuable landing and departure slots at Heathrow Airport. Even if this did not occur, it is projected that the Company would run out of available (free) cash altogether during the week commencing 5 October 2020.

4

In such circumstances, without a restructuring of its liabilities and an injection of new money, the Company's directors would have no choice but to place the Company into administration in mid-September 2020 in order that its business could be wound down in an orderly manner and its assets sold. The Company has received independent expert advice from Alvarez & Marsal that this process would be likely to result in a very poor outcome for the Company's creditors of between 10.5p to 21.4p in the £, and that it might take a couple of years before a first dividend was paid in the administration.

5

To avoid this outcome, the Company has proposed the Restructuring Plan as part of a broader suite of inter-conditional arrangements which it has negotiated over a comparatively short and intensive period of a few months with creditors, other stakeholders and third parties (the “Recapitalisation”). The Recapitalisation aims, among other things, to reduce the Company's debt to a sustainable level, to provide for a deferred repayment schedule for that debt, and for there to be an injection of new money from VIL (£200 million) and Davidson Kempner (£170 million) so that the Company can continue trading.

The Restructuring Plan in outline

6

The Restructuring Plan involves four classes of Plan Creditors:

i) the lenders under a $280 million secured revolving credit facility agreement (the “RCF” and the “RCF Plan Creditors”);

ii) the lessors under 24 operating leases for aircraft leased to the Company (the “Operating Lease Agreements” and the “Operating Lessor Plan Creditors”);

iii) certain creditors (including other Virgin companies and companies in the Delta group) who have entered into various intellectual property licensing agreements and joint venture agreements with the Company (the “Connected Party Plan Agreements” and the “Connected Party Plan Creditors”); and

iv) 162 of the Company's trade creditors (the “Trade Plan Creditors”) who are individually identified in a schedule to the Restructuring Plan and who are owed a total of about £51.67 million.

7

The debts owed to these four classes of Plan Creditors will be varied under the Restructuring Plan as follows.

The RCF Plan Creditors

8

The Restructuring Plan will make various amendments to the terms of the RCF, including: (i) converting the RCF into a term loan facility; (ii) extending the final maturity date to 17 January 2026; (iii) changing the repayment schedule so that the currently drawn loans are repayable in three annual instalments starting on 17 January 2024; (iv) increasing the margin payable on the outstanding balance by 1% per annum; (v) amending the suite of covenants and events of default to enhance the position of the RCF Plan Creditors; and (vi) inserting a mechanism that enables the RCF Plan Creditors to receive repayment of any deferred amounts out of the Group's excess cash flow (a “cash sweep”) together with certain of the Company's other stakeholders.

9

In addition, one of the aircraft engines that is currently part of the security package for the RCF will be released from the security (so that it can be used as security for a new money facility). In exchange, the Company will grant the RCF Plan Creditors security over a bank account with a credit balance of $23.3 million pending the addition of a new engine to the security package in 2021.

The Operating Lessor Plan Creditors

10

The Operating Lessor Plan Creditors are entitled to choose between three options. The first option involves a deferral of rent for a defined period of time; the second option involves a 20% reduction of rent coupled with a deferral; and the third option involves the termination of the relevant lease and redelivery of the aircraft.

11

In the event, all of the Operating Lessor Plan Creditors have chosen the first option (“Option 1”). The basic terms of Option 1 are as follows:

i) from 1 April 2020 to 30 September 2021 inclusive (the “Operating Lease Deferral Period”), the Company shall only pay 15% of the rent due. The balance will accrue and be capitalised. Interest shall also accrue and be capitalised on the deferred rent (at a rate of 1% per annum) during the Operating Lease Deferral Period. No default interest shall accrue or be payable on the deferred amounts;

ii) if the Company's airline revenues from 1 January 2021 to 30 September 2021 inclusive are less than or equal to £750 million then the Company may elect to extend the Operating Lease Deferral Period to 31 December 2021, in which case the same deferral provisions described above will continue to apply; and

iii) at the end of the Operating Lease Deferral Period, the Company will recommence paying rent in full, and the deferred rent payments will be paid in 48 equal monthly instalments from 2022 to 2025.

12

The Operating Lease Deferral Period is deemed to commence on 1 April 2020. Since that date, the Company has paid (or part-paid) various instalments of rent that have fallen due. In some cases, the Company has paid less than the 15% entitlement of the relevant lessor under Option 1 above. In other cases, the Company has paid more than the 15% entitlement of the relevant lessor under Option 1 above. Accordingly, under Option 1 the rent paid since 1 April 2020 will be subject to a “true-up” arrangement to equalise the amounts that such lessors have received so as to ensure that all Operating Lessor Plan Creditors are treated fairly. The Operating Lessor Plan Creditors will also benefit from the cash sweep, in priority to the RCF Plan Creditors.

The Connected Party Plan Creditors

13

The Restructuring Plan will make the following amendments to the Connected Party Plan Agreements:

i) all accrued and unpaid amounts due by the Company to each Connected Party Plan Creditor when the Recapitalisation becomes effective will be capitalised in exchange for preference shares in VAL (“Preference Shares”); and

ii) all accrued and unpaid amounts due by the Company to each Connected Party Plan Creditor (other than under the Delta Air4 Agreement) that become payable after the Recapitalisation until 2026 shall be capitalised in exchange for Preference Shares on 31 December each year.

The Trade Plan Creditors

14

The Restructuring Plan will vary the rights of the Trade Plan Creditors as follows:

i) all amounts owed to Trade Plan Creditors by the Company with respect to goods or services supplied by each Trade Plan Creditor prior to 13.30 hrs UK time on 14 July 2020 (being the time when the Practice Statement Letter was issued as referred to in paragraph 29 below) shall be reduced and discharged by 20%; and

ii) the remaining balance of 80% of the original debt (i.e. after applying the 20% reduction) shall be paid to each Trade Plan Creditor in cash in nine instalments. The first payment will be made shortly after the Recapitalisation becomes effective and payments will continue by eight further quarterly payments commencing on 31 December 2020 and including interest at a rate of 1% per annum.

15

Any claims of the Trade Plan Creditors in respect of goods or services supplied after 13.30 hrs UK time on 14 July 2020 will not be compromised by the Restructuring Plan. This is designed to ensure that the Trade Plan Creditors do not cease to supply the Company with goods and services.

Plan Mechanics

1...

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