A ‘New Look’ at fairness: Company Voluntary Arrangement Primer

Welcome to the 141st Pari Passu Newsletter, 

Today, we are taking a look at a unique legal restructuring tool across the pond, the English Company Voluntary Arrangement (CVA). The CVA had become the go-to restructuring tool for distressed UK retailers in the late 2010s and early 2020s, not because it overhauled financial debt but because of its usefulness when cramming down landlords. Originally conceived as a fast, inexpensive compromise mechanism for Small and Medium-sized Enterprises (SMEs), the CVA has evolved into a powerful tool for shedding lease liabilities without the procedural guardrails of class voting or judicial confirmation.

Today, after the New Look case and the rise of new cross-class cram-down restructuring tools in England,  the CVA has faded in popularity. Nonetheless, the CVA is an interesting case study that provides a contrast to more formal restructuring processes like Chapter 11, and delving into CVAs will help bolster our understanding of fairness in restructuring. We will begin with a Primer on CVAs and the issues that landlords as a class face when leases are included in a CVA. Then, we will have a look at New Look and its 2021 CVA before finally drawing some comparisons between CVAs and Chapter 11s.

9fin: the faster, smarter way to find debt market intelligence

9fin is the faster, smarter way to find debt market intelligence. Through our data and analytics platform, 9fin centralizes everything that's needed to analyze a credit or win a mandate in one place - helping subscribers win business, outperform their peers and save time. With 9fin, you can:

• Instantly access docs, news, covenants and cap structures

• Monitor your universe with alerts, earnings coverage, and deal tracking

• Save hours with AI-powered search and workflow tools

We’re trusted by over 250 of the biggest firms in the market — including the top 10 investment banks, leading law firms, and asset managers with a combined total of over $17trn AUM.

Want to try it out? We’ll give you 30 days free to explore 9fin and see what we have to offer.

Company Voluntary Arrangements Primer

Before we dive into CVAs, let’s make sure we have a strong understanding of what corporate rescue tools are.  A corporate rescue tool is a legal mechanism that reduces the level of consent needed from creditors to amend the company’s debt obligations. For example, Chapter 11 can be utilised as a corporate rescue tool as it can reduce the required consent from a class of creditors from 100%  to two-thirds in value of the debt and over half in number of creditors of the class. This is referred to as ‘cramming down’; the rest of the creditors in that class can be subject to new debt obligations that they did not agree to. Chapter 11 can also go further to impose new debt obligations on a class where all its creditors object to the amendments, where the ‘two-thirds in value and half in number' threshold is reached in another class (cross-class cram down). As a general rule, the more the consent threshold for altering the debt’s terms is reduced, the stronger the justification is needed for changing and imposing new obligations on the dissenting creditors. 

Subscribe to Pari Passu Premium to read the rest.