Virgin Atlantic Files For Chapter 15 Bankruptcy

Filed Under: Virgin Atlantic

A few weeks ago Virgin Atlantic revealed the full details of its planned recapitalization, and this week the airline has filed for Chapter 15 bankruptcy in US courts. What exactly is going on here, and is this as big of a deal as one might think?

Virgin Atlantic’s planned recapitalization

For a bit of background, in mid-July Virgin Atlantic shared the specifics of its planned recapitalization, as the airline was running out of liquidity. The airline is supposed to get a refinancing package worth over £1.2 billion over the next 18 months, which includes the following:

  • The Virgin Group is investing a further £200 million
  • Shareholders are deferring £400 million of shareholder deferrals and waivers
  • Davidson Kempner Capital Management LP, a global institutional investment management firm, is providing £170 million of secured financing
  • Creditors will support the airline with over £450 million of deferrals

In order to secure approval from all creditors, the plan has to go through a court-sanctioned process, to be completed by late in the summer.

Virgin Atlantic already announced a recapitalization

Virgin Atlantic files for Chapter 15 bankruptcy

Many people were caught off guard when Virgin Atlantic filed for Chapter 15 bankruptcy in US courts yesterday. This is very different than Chapter 11 bankruptcy (which we’ve seen several other airlines file for), as Chapter 15 bankruptcy is intended to support the solvent recapitalization of a company.

Here’s how Virgin Atlantic described the decision to file for Chapter 15 bankruptcy in the US:

“Virgin Atlantic attended court yesterday (4th August) as part of a solvent recapitalisation process under 26(A) of the UK Companies Act 2006. That process is proceeding with the support of the majority of our creditors.

Following the UK hearing held yesterday (4th August), ancillary proceedings in support of the solvent recapitalisation were also filed in the US under their Chapter 15 process. These ancillary US proceedings have been commenced under provisions that allow US courts to recognise foreign restructuring processes.

In the case of Virgin Atlantic, the process we have asked to be recognised is a solvent restructuring of an English company under Part 26A of the English Companies Act 2006.”

Virgin Atlantic filed for Chapter 15 bankruptcy

Virgin Atlantic could run out of cash next month

The court documents filed as part of this recapitalization contain some interesting details about the situation that Virgin Atlantic is really in. While Virgin Atlantic has the support of a majority of its shareholders, the recapitalization isn’t quite as straightforward as many had assumed:

  • Without this recapitalization being approved, Virgin Atlantic could collapse in September; that’s because the airline will drop below £75 million in cash, and at that point some of its largest loans automatically default
  • Leasing companies that own 24 of Virgin Atlantic’s planes will have the option of either accepting reduced leasing rates or taking the planes back immediately; it seems Virgin Atlantic is confident that leasing companies don’t want their planes back, or else it may be losing a majority of its fleet
  • Creditors will be paid 80% of what they’re due immediately, with the other 20% being paid over the next couple of years

Virgin Atlantic’s leasing companies will have to accept reduced rates

Bottom line

While the initial headline of Virgin Atlantic filing for bankruptcy in US courts may have come as a shocker, the reality is that a Chapter 15 filing is simply a step in Virgin Atlantic’s previously announced recapitalization plan.

It is interesting to learn some more details of Virgin Atlantic’s recapitalization — the airline would default on its loans in September if this doesn’t work out, and leasing companies for two dozen of Virgin Atlantic’s planes will either have to reduce leasing costs or take back the planes.

This is the latest Delta partner to file for some form of bankruptcy in US courts, as we’ve seen both LATAM and Aeromexico file for Chapter 11 bankruptcy, and then Virgin Australia has filed for voluntary administration in Australia.

What do you make of Virgin Atlantic’s Chapter 15 filing?

Comments
  1. Not an expert here but it just surprised/confused me that it was filed in the US and not in the UK. I always thought Virgin Atlantic was a UK company and therefore expected it to file this in UK courts (not US.)

  2. @Joey, the Chapter 15 filing (note, not Chapter 11 which is the US bankruptcy proceeding) is there to protect the restructuring under UK law, which is what is happening here. Delta’s stake means that VS could be sued for their restructuring in the US otherwise.

    Now that a UK judge has allowed the talks to go ahead in the UK, VS needs to protect itself from US litigation, hence the Chapter 15 filing.

  3. @Joey
    As Ben wrote, the first stage was filing in the English courts; the US proceedings are simply a subsidiary action, to protect assets in the US.

    Virgin Atlantic is not out of the woods yet: much depends on the speed and type of any recovery in the travel industry.

  4. Interesting, so my take from this post is to not immediately transfer my VS miles to Hilton just yet.

  5. To add to previous responses, Chapter 15 basically aligns cross-border reorganizations. If approved, it means that no creditors/shareholders in the US can object to the plans submitted and approved in the UK. Any objections would have to be filed in the UK as part of the process already underway in the UK.

  6. I know we’re supposed to be pro-Delta and anti-United and AA around these parts, but Delta’s “excellent management” sure seems like they made some absolutely terrible bets. Time will obviously tell what happens, but not a good look for their business development department.

  7. It’s interesting to see how many airlines from around the globe find a way to rescue themselves under US bankruptcy legislation – which in contrast to the legislation in their home countries is very restructuration and recapitalization friendly. In most countries both the depletion of capital or illiquidity unavoidably wipe out the company. If we still have airlines after the COVID crisis this is thanks to US legislation.

  8. @ Business Guy

    Its not being pro Delta or anti United. No one could have foreseen COVID-19. Delta is still a very well managed airline and these recent events are not a knock on their business development department. When Delta made those investments, did any of us question the moves? No. Because they were good business decisions at that time. As the saying goes, we all have plans until they don’t work out. It did not work out. But the reason is COVID-19 and not that those were bad business decisions.

  9. @Andy
    That’s not true. As has been explained, Virgin is using English law in the English courts. The US filing is just a subsidiary action to stop hyper-litigious Americans trying to subvert the UK’s legal processes.

    “US law” is a rum old mess, your chances often depending on which state you end up in and the mood of an often under-qualified judge. US bankruptcy laws are heavily skewed in favour of big capital (just ask any Big3 airline employees who lived through their respective bankruptcies what happened to their pensions).

    For a non-partisan assessment of which country has the most effective legal system, have a look at where multinationals in different jurisdictions nominate the law under which a contract will be litigated (say, a Japanese multinational contracting with an Indian multinational to deliver a multi-million dollar civil engineering project in Brazil). It almost always will be under English law, with disputes resolved in the high court in London. It’s such big business that they recently built a brand-new set of London courtrooms specifically to handle commercial litigation where none of the parties or events are related to the UK.

    Multinationals do that because they know they’ll get predictable outcomes in litigation which will be reasonably swift and expertly handled. The UK has more of those “foreign party” cases than the rest of the world put together. Certainly more than the US.

  10. @The nice Paul

    Almost all of the funded debt obligations owed by Virgin Atlantic are most likely governed by New York law and permits litigation in the U.S. by design. Virgin has the ability to choose not to do it this way, but they want access to capital markets (and those capital markets want to protect their investment by keeping the ability to litigate in the U.S. where an outcome is more predictable). There is a rhyme and reason why people do it this way. LATAM did, Avianca did, etc. etc.

    Blaming it on hyper-litigious Americans misses the point. U.K.-based hedge funds and private equity make use of the U.S. legal system all of the time.

    The U.S. bankruptcy system is the most sophisticated in the world. Hence why large companies want to use it. It levels the playing field and wards off excitable vultures.

  11. As a member of the “transferred MR to VS for ANA F, forced to cancel due to Covid, sure hope I don’t lose those miles” club, I wish Virgin Atlantic the very best.

  12. @Clay
    Exactly so — VIrgin has some arrangements in the US which it is seeking to wrap into the English bankruptcy / reorganisation procedure. It’s just being neat and tidy, making sure everything is dealt with in the UK.

    I certainly disagree with you that people choose to litigate in the US because “an outcome is more predictable”. Virgin’s US proceedings are only to close off US litigation — which, from my experience managing legal actions in three continents, is one of the *least* predictable systems among the world’s more sophisticated jurisdictions. And I’ve already given you the example of foreign multinationals — who have a choice where to litigate — pretty much *never* choosing the US legal system. That tells you something important, if only you can get over patriotic fervour clouding your judgement — the US is not always the best at everything.

  13. > No one could have foreseen COVID-19.

    But this is what Taleb calls “tail risk”. No, nobody predicted specifically that a SARS coronavirus would come out of Wuhan in late 2019 (though plenty of people predicted each component, as they always do), but the possibility that *some* pandemic would severely curtail air travel in the next N years was serious enough that it should have been hedged against.

  14. @The nice Paul

    Not sure what “patriotic fervour” you’re referring to. I’m stating facts. The UK has a process under which a company can obtain relief through negotiations with creditors to amend its debt instruments. The company then seeks chapter 15 relief in the U.S. to obtain recognition of the changes to the debt instruments. It’s an important one-two punch that the countries utilize.

    An outcome in a New York court is quite predictable because they are used to dealing with commercial disputes. A personal injury lawsuit or some other general civil suit, I’d admit, can be quite unpredictable. Two different things. Given the experience you indicated, you certainly know that many large companies utilize debt instruments which prefer litigation in the U.S., specifically New York.

    There might be other reasons not to litigate in the U.S., but one of them is not the lack of predictability on large debt obligations (like the type airlines are party to).

  15. @Clay
    We’re not necessarily disagreeing. You’re arguing that NY, which is the world’s biggest financial market for most products (not all), also has the legal expertise that goes with those financial transactions and, since the party providing the financing is based in NY, it makes sense to have that as the jurisdiction.

    Equally, where a neutral and efficient jurisdiction has to be chosen when none of the parties are based there, multinationals overwhelmingly choose London. Overwhelmingly.

    London doesn’t have a monopoly and there are other jurisdictions that are sometimes chosen — Paris is favoured by Francophone countries for obvious reasons, and it has the benefit of sophisticated expertise in arbitrations. But my experience is that if there is no US party, the US is pretty much never chosen as a jurisdiction for multinationals.

    Whereas the US is frequently chosen by individual “forum shoppers” especially in, as you say, civil litigation. God knows I’ve spent huge sums of my employer’s cash managing nuisance law suits that people flock to the US to have heard. My last case in Illinois saw a normal legal doctrine long-established there, and in every other common law jurisdiction I know, effectively abolished by the state appeals court. Utterly bizarre.

    For me, most of the US is on a level with Italy, places I really don’t want to have litigation. Frankly I’d rather have litigation in places like Mexico.

  16. Can someone here please explain to me how a foreign company can file bankruptcy in the US? Guess if I ever decide to delare bankruptcy I will file in another country then!

  17. @Takhliq Khan,

    Many of us did question Delta’s moves at the time. Throwing money at firms with poor fundamentals is never wise. Delta’s management culture is very hubristic and thinks they cannot somehow fix carriers that other talented and resourceful management teams have been unable to turnaround just because they are Delta.

  18. Not familiar with these proceedings however just one question: I’ve had my flights cancelled way back in June and still waiting a refund from Virgin. Does this in any way affect me getting a refund?

  19. A lot of misinformation in these comments about chapter 15, chapter 11, UK proceedings and US litigation, all from people who seem to haven’t a clue.

  20. @Josh —

    Any company with assets in the U.S. can file for bankruptcy protection in the U.S. This is true even if the assets are of little or no value.

    Many companies chose to file for chapter 11 protection in the U.S. because it is a fairly unique and extremely predictable insolvency regime. Among other things, chapter 11 allows the company to continue operating, management stays in place absent compelling circumstances, the company can borrow additional money despite its insolvency, and there are powerful tools for shedding burdensome contracts, leases, and other obligations. Plus, chapter 11 has a concept called “cram down” where a company can confirm a plan of reorganization without the consent of all of its creditors or other stakeholders. Many of these are features unique to chapter 11 that do not exist in other countries‘ laws. Believe it or not, many countries do not even have an insolvency proceeding where the company can continue as a going concern. In many countries, once the company becomes insolvent, it is required to liquidate or else its officers and directors may be personally liable for unpaid debts of the company that are incurred after the company reached insolvency (this is known as “trading while insolvent”).

    The suggestion by some that the UK has a superior insolvency or restructuring regime is subjective, but largely false. You need look no further than the UK’s adoption in June of this year of amended laws modeled after U.S. insolvency laws. In order words, the UK knew the U.S. was doing it better and modeled their law after the U.S. Virtually every other “reorganization” or “restructuring” legal regime in world is modeled after U.S. chapter 11 in at least some respect. Even with that, the U.S. typically is still the preferred place to seek reorganization. This is why many Latin American Airlines that have recently filed for chapter 11 protection in the US, rather than in their home countries (or the UK). All of that said, the UK’s regime is a very good one. Canada and many commonwealth countries also have very good regimes. The US, the UK, Canada, the Cayman Islands, and Bermuda are probably the top 5 most favored places to seek creditor protection to reorganize, restructure, or liquidate.

    So why did Virgin Atlantic file for protection in the UK versus the U.S.? Likely for three reasons. One, VA is based int the UK and, as mentioned, the UK has a very good regime. Two, VA is actually doing a “solvent” reorganization, meaning creditors will ultimately be paid in full, albeit over time. This means that VA does not have a need to use the “cram down” feature of US chapter 11. Three, VA can still access the U.S. courts through the chapter 15 filing it made.

    Chapter 15 is different than chapter 11. Chapter 15 is the U.S.’s adoption of UNCITRAL’s Model Law on Crossborder Insolvency. The UK and many other countries have adopted this law as well. Countries that have adopted the Model Law will typically “recognize”—i.e., give full force and effect to—insolvency or restructuring proceedings in another country and orders entered in those proceedings. In a chapter 15 case, the foreign company files for protection in another country (typically its home country) and then almost immediately also files for recognition of that protection in the U.S. With few exceptions, the U.S. courts grant recognition and extend key protections of U.S. bankruptcy law (such as the automatic stay against creditor collection efforts) to the foreign company’s assets that are in the territorial jurisdiction of the U.S.

    The corollary is true, too. When a company with significant overseas operations files for chapter 11 protection in the U.S., it typically will commence the equivalent of a chapter 15 case in each foreign country where it has assets or operations to be sure to enjoy protection from creditors in those countries.

    In some cases, there may be several, if not dozens, of parallel insolvency proceedings. The Model Law allows these proceedings to all be coordinated and for the value of assets that are collected or realized upon to be streamed to the main proceeding (e.g., the U.S. chapter 11 proceeding, or the UK administration proceeding, or what have you). An equitable distribution to creditors will then be made in the main proceeding. Without the Model Law, it would be a piecemeal patchwork of regimes across the world with people racing to take action against the company or the company’s assets, resulting in preferential outcomes to some creditors at the expense of others.

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