During the recent lockdown, hotels can only remain open in very limited circumstances and restaurants remain closed although food and drink can be served through room service. The sector did have a brief respite from closure as they could trade over the summer months last year, with those in key city centres and seaside locations seeing most benefit. 

Hotels in England will be able to reopen for leisure stays from 17 May. However, many of the owners of these businesses will be facing an uncertain future due to the lack of available working capital and balance sheets laden with debt. Whilst the Government has provided much needed support since the outbreak of the pandemic, as the life support measures are slowly withdrawn it will be a case of survival of the fittest. 

Businesses need cash to re-open. The tapering off of furlough will lead to the reabsorption of payroll costs. In addition, business rates will become payable in full for many businesses. Directors are likely to have undertaken top to bottom reviews of operations and streamlined as much as possible. On reopening, there will be the need to ensure that the business meets consumer expectation in terms of social distancing and hygiene measures as well as product offering. 

Before looking at the possible available restructuring solutions it is perhaps worth reviewing the balance sheet:

Asset values: These are likely to have been impacted, particularly in those asset classes that could be permanently affected by changes in consumer habits such as in the conference and airport markets. It remains to be seen how these will recover. Property agents however, do predict that trophy assets and key staycation markets will remain strong. 

Cash: A recent survey by the ONS found that more than half of businesses in the accommodation and food service sectors had three months or fewer of cash reserves. Although there is also anecdotal evidence that suggests some businesses in the sector have reasonably strong cash reserves due to HMRC deferrals and COVID-19 lending. Businesses without sufficient reserves or access to cash are likely to encounter issues, particularly if they open early, and should ensure they have appropriate staffing and safety measures in place. 

Lease liabilities: Whilst the hotel sector does not have the same exposure to lease liabilities outside the larger branded chains, it is worth noting that the temporary prohibition on landlords forfeiting leases has been extended to 30 June and the restrictions on landlords exercising CRAR are also extended. Whilst these measures are welcome they do not deal with the issues facing tenants which is how they will repay lease arrears. Some landlords are recognising the need for flexibility, without which businesses with significant rent arrears may struggle to bounce back. 

HMRC debt: Businesses could defer VAT liabilities due between 20 March 2020 and 30 June 2020 to 31 March 2021. This can now be further extended by opting into a payment plan by 21 June 2021. This will assist cash flow but again requires the liability to be settled in full. It should be noted that with effect from 1 December 2020 HMRC were given preferential status ranking ahead of secured lenders with floating charges and unsecured creditors in respect of unpaid VAT, PAYE and employees national insurance contributions. This change in status will have an impact on recoveries to lenders in enforcement scenarios and is likely to impact on future lending decisions and lender negotiations in restructurings, although fixed charge lender security is not affected.

Secured debt: Many businesses will have taken out additional secured facilities by way of CBILS or CLBILS loans depending on the size of the business in order to fund working capital in the absence of any or limited revenue. These loans are partially backed by Government guarantees. Debt repayment holidays or deferrals are at the discretion of the lender. There is currently limited data available as to how lenders will approach restructuring of debt which has a partial Government guarantee. The HMRC preferential status as discussed above will also have a bearing on lenders attitudes to restructuring. To date there have been unprecedented levels of forbearance by lenders. 

In the event that directors conclude that consensual agreements with key stakeholders cannot be reached, there are a number of formal restructuring options available to them. A popular tool prior to the COVID-19 pandemic for restructuring a business with a leasehold estate was a Company Voluntary Arrangement (CVA), which enables a company to make proposals to its unsecured creditors to compromise their claims. This was used successfully by Travelodge in June 2020 for a restructure of the leasing liabilities of the group. Another well-known process is that of a Pre-pack Administration sale, whereby the company is marketed via an accelerated M&A process with the business sold immediately upon appointment of Administrators. 

Newer options for the sector can be found in the new The Corporate Insolvency and Governance Act (known as CIGA for short) which came into effect on 26 June 2020. This legislation was fast-tracked as a result of the pressing need to support UK businesses in light of extensive COVID-19 disruption. CIGA introduces a number of powerful measures to improve the potential for distressed companies to survive, stabilise and prosper:

1. Protection from creditors for viable companies: a standalone moratorium that leaves the directors in charge of delivering a solution (overseen by a qualified ’monitor’) while providing a standstill from a wide range of historical obligations. The key issue for moratoria in the hospitality sector is that certain liabilities including rents need to be paid as they fall due during the period of the moratorium. 
    
2. A new debtor-led compromise procedure: the ‘restructuring plan’, modelled on a scheme of arrangement with scope for greater flexibility, including the power to prevent dissenting creditors from obstructing a viable restructuring if certain circumstances are met.
    
3. Protection from supplier disruption: a prohibition on termination clauses being triggered by the new moratorium, restructuring plan or other formal insolvency proceedings.

These reforms represent the biggest change to the UK’s restructuring and insolvency legislation since the Enterprise Act which came into force in 2003. The measures go to the heart of many of the components of a successful turnaround, including encouraging early engagement with stakeholders, and an acknowledgement that reaching out for support should not mean having to give up control. The new moratorium allows strong boards with credible plans to act early and drive company rescue, supported by turnaround professionals with valuable situational experience. The greatest barrier to an optimal outcome is often ‘runway’. The new measures afford companies enhanced scope to develop and deliver structured turnaround plans with an increased opportunity to drive operational and financial restructuring. 

The most high profile use of the new legislation case in the hospitality sector is that of Pizza Express. Here a restructuring plan effected a major financial recapitalisation and de-leveraging, together with a CVA to effect an operational restructuring of its leasehold liabilities. The first example of a cross class cram down, where dissenting creditors were prevented from obstructing a viable restructuring plan, has been seen in the Deep Ocean. Virgin Active have also put forward a restructuring plan. The outcome for this will take a number of weeks. The Court has approved the convening of plan meetings on 16 April with a Court Sanction hearing on 29 April. A number of landlords were represented at the convening hearing and it will be interesting to see whether a cross class cram down is the outcome in this case.

More widespread use of the new legislation has been delayed as a result of the Government’s continued support measures, particularly with regard to the restrictions on actions by landlords and the issuing of winding up petitions, which has been further extended to 30 June 2021 and may yet be further extended. However, as we exit lockdown more business owners will need to explore all options available to them which will likely vary dependant on the specific circumstances of each business but may well include one of the tools introduced by CIGA.

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