Foreward by Andrew Chilvers
When the UK government recently paid Cardiff Airport’s £42.6 million debt and then provided £42.6 million in grants, it was following the same path adopted by governments around the world to try to bring long-term stability to businesses during the pandemic.
Emergency measures like these were designed to protect companies during the pandemic and into the post Covid-19 era.
Such emergency loans – given to countless businesses large and small across the UK – also coincided with announcements by Chancellor Rishi Sunak that the British government was extending its £68 billion coronavirus emergency loan while the employment furlough scheme finally ended in July 2021.
Along with this aid he also included an extension of the £19.6 billion Coronavirus Business Interruption Loan Scheme and the £5 billion Coronavirus Large Business Interruption Loan Scheme. However, while many global business people see rescue packages as laudable, restructuring and insolvency professionals warn it’s a solution that either pushes the problem into the future or – worse – creates zombie companies out of bad and good businesses alike.
In the UK, total company insolvencies for the first quarter of 2021 dropped by 22% compared to the final quarter of 2020 and were down a huge 38% compared to the same quarter in 2020.
Across Europe, North America and Asia it was a similar story throughout the pandemic. The number of insolvencies consistently dropped as a result of various government aid initiatives. In most normal economic cycles, there is often a lag between a financial crash and insolvencies, but the current lag has defied most predictions by insolvency professionals. Initially, they predicted a spike in late 2020, then early in 2021, now they’re saying the increase will be at the start of 2022.
So, the question: when is the wave of insolvencies going to happen – given that governments continue to bail out businesses – and what will be the extent of that wave?
What are the levels of company insolvencies predicted in your jurisdiction? Which sectors have been most badly hit by the pandemic?
Malaysia has been going through different waves of Covid-19 and we’re now on the fourth wave. Generally, we did not see many insolvencies last year and the reason was because of the huge amount of government assistance; current policy measures have made it difficult for winding up businesses. Sectors that have had the biggest problems include airline and hospitality; hotels, restaurants, pubs, movie theatres. David Foster pictured at the IR Global Annual Conference in London, 2018.
The retail industry is also having a tough time because online purchases have adversely affected shopping malls, retail outlets. Elsewhere, the construction industry has taken a hit because Malaysia is largely dependent on a foreign labour force for building and many of them have been barred from entering the country. That has affected the supply side, while on the demand side there’s been a big mismatch in terms of high-end condos, commercial condos, residential condos. To compound this issue of overcapacity in the retail segment, there are new shopping malls currently under construction that will commence operation in the near future.
On the commercial side we’re getting office blocks opening and that’s going to be a problem; like Mexico, at the moment we have a huge number of small and medium enterprises with severe cash flow issues. The industries that seem to be doing better include electrical and the electronic industries, glove manufacturers and the oil and gas industry.
As with other members, our hotels have got a new business model, converting to quarantine centres – and those that have gone down that route are doing well. As with Hong Kong we’re seeing a lot of profit warnings and also a worrying rise in the manipulation of financial data to retain share prices.
What are governments doing to lessen the impact of the pandemic regarding distressed companies? Are these government measures simply delaying the inevitable?
The Malaysian government has put in some measures to mitigate the number of insolvencies; for instance they’ve passed the Temporary Relief Act, which increases the threshold for winding up from $2,500 to $12,500. Now you need to have a debt of at least $12,500 before you can wind up by providing statutory notice, which was initially 21 days but has been extended to six months. But the statutory notice period reverted to 21 days because they found that the minister did not have the authority of parliament to extend those periods.
Then the government also enacted a force majeure clause, where no actions can be taken for non fulfilment of contracts where time is of the essence. There was also a loan repayment moratorium in place for about six months. The government injected just under $14 billion in 2020 and about $9 billion to date to stimulate the economy through loan assistance to small and medium businesses, direct cash handouts, tax relief, wage subsidy and so forth.
Recently the government introduced a corporate rescue mechanism. We have corporate voluntary administration, judicial management and schemes of arrangement as pre liquidation work. We were working to get the refinement done with the introduction of things like provisions for super priority financing, cramdown, extending schemes to listed entities and so forth. But parliament is not yet in session and so further amendments to make the pre winding up mechanism a bit more effective have not yet gone through.
Elsewhere, the government is under fiscal constraints because tax revenues are plummeting and they have been incurring additional costs to stabilise the economy – and there are vaccination- related costs.
As a consequence of all this, the government’s ability to manoeuvre and provide more handouts during the current lockdown is very limited compared to the first lockdown we had just over a year ago. From December last year, there were 3,300 compulsory winding ups compared to 5,700 in 2019. Basically, it was kept artificially lower, but we see the insolvency rate spiking in the coming period.
Will the huge numbers of predicted insolvencies and restructurings point to a spike in M&A and buyout activity, particularly across borders? And how are IR Global advisors assisting clients during this period of uncertainty?
We anticipate buy out opportunities of distressed assets. In addition, over the years many government- linked companies and public listed entities strayed into all kinds of businesses from their core business. This pandemic has basically forced them to restructure and increasingly divest non core businesses. So that will be an opportunity. And, of course, with the e-commerce businesses, companies will be seeking to acquire warehousing and transportation-related businesses. Companies are also beginning to look into the acquisition of NPLs on loan portfolios which have been lower because of all the measures that the government taken. The banks will start to offload NPLs.
We are working to facilitate the government to rehabilitate abandoned residential commercial properties. Working with companies on schemes of arrangements and corporate voluntary administration because there are so many viable companies but they face cash flow issues. As a result we are proposing haircuts, deferred payment schemes, maybe providing some security or equity participation along with moratorium’s from legal actions. And finally, through the Insolvency Practitioners Association of Malaysia and the Malaysian Institute of Accountants, we have been advising relevant ministries on the amendments required to the various legislations to promote rescue mechanisms rather than liquidation.
These are things we are trying to do. Otherwise, if we don’t revert to a rescue mechanism to save this viable companies facing short-term cash flow issues, then it’s going to devastate the economy.