David Foster participates in the IR Global Virtual Series – Day of Reckoning: Insolvencies in a post pandemic world

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?

We’ve seen a record number of UK-listed companies issuing profit warnings, while the number of company insolvencies has been down. Some 72% of FTSE retailers have now issued profit warnings in the past 12 months. A lot of companies are breaking records on that front and we’re seeing a lot of businesses just keeping their heads above water.

There have certainly been a number of sectors that have been particularly badly hit. These include automotive, retail and hospitality. It seems to affect the type of business rather than the size of the business. Elsewhere, you see pockets that do seem to do OK. For example, what’s called athleisure. This has done well in the retail sector; a little pocket of success in fashion. But a lot of what’s happening in terms of the sectors is just about people really having strategies to survive, particularly in the new online environment, and keeping a fairly established presence there.

The other areas that have done well have been defence, music publishing, dispensing chemists and furniture retailers have bounced back. Although the hospitality sector has done badly, camping has done well. So, it’s overall pretty patchy really and in the future much will depend on how far businesses can be clear about what their purpose is and look at areas like sustainability and whether or not what they do fits in with some of the wider trends in business.

What are governments doing to lessen the impact of the pandemic regarding distressed companies? Are these government measures simply delaying the inevitable?

What are the government doing? Lots of things. We’ve had three lockdowns so far; we’ve got the furlough scheme; the government has been paying sick pay where people have coronavirus; there’s been coronavirus grants of various kinds, and bounce back loans where SMEs can borrow up to 25% of their turnover up to certain caps.

There are also Covid-19 corporate financing facilities. That’s an interesting one because with this the government supports large businesses by buying unsecured short-term corporate debt, known as commercial paper and effectively provides short-term loans so companies have easy access to cash.

But there are certain restrictions for those companies. They can’t pay dividends to shareholders or buy back shares or increase senior pay. But the Bank of England is effectively acting as the Treasury’s agents and printing to help that happen.

Then there are business interruption loans for small businesses under £44 million and larger schemes for companies over £44 million, with government guaranteeing 80% of loans. Elsewhere, there are the business eviction bans.

So, all in all, the government is doing a lot to help businesses. But is it delaying the inevitable? Yes, we’re going to see companies that would have gone bust, or going bust a bit later.

That’s certainly going to happen. The withdrawal of government support is going to be challenging for businesses that are weak. And that weakness in part would have been caused by the pandemic. Then there are other companies that are going to be in difficulty because they’ve just been slow to adapt to changes in the market. But what has happened is that because of government support, the economy is getting stronger. We’ve got a stronger than expected economic outlook. Confidence is better.

I think the biggest danger is not even so much the pandemic now. It’s much more about have people got the courage to reposition their businesses and then do better because of that – and avoid insolvency through their own direct action?

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’ve got the situation where at the start of last year there was very low business optimism and no M&A activity at all. Then we received this government support and it’s looking a lot more positive – and the market is certainly beginning to turn. It’s likely that we will now see more M&A work activity, particularly fuelled by semi distressed businesses and also private equity companies that have money they want to spend. We’re also seeing in the UK some Asian investments in London, particularly from the Hong Kong British coming in and wanting to put their money into London.

So why is that? Because of the political situation in Hong Kong. Hong Kong investment has been keeping property prices as high as they have been for some time. As a result of all this new optimism, opportunities will abound for companies which are in the right place to capitalise on them. And key for any company will be the question: does that acquisition fit into our business strategy? Having a good understanding of the commercial aspects of the business target is going to be increasingly important to the UK.

How do you think you as an adviser can help clients within this period of uncertainty? What we’re trying to do is always place ourselves as the trusted business advisor. That’s especially important over all of the potential needs and issues, knowing where help is, how certain issues have been affected. Litigation is an obvious one; also helping them with their priorities over acquisitions; trying to integrate advice on tax, business risk and the like; and then advising them about new trends occurring from new ways of understanding property rentals to investing in clean energy. Finally, being a friendly sceptic, which is what lawyers are quite good at doing!

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