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

Gwynn Hopkins

Managing Director, Perun Consultants

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’re seeing similar themes emerging over here. The main industries that were clobbered were retail, hospitality, food and beverage, airlines and hotels. However, the hotels that managed to become quarantine hotels did well – it’s essentially a new business model for some hotels in this new pandemic world.

With retail, for example, in Hong Kong the luxury end has suffered. Much of it depended on tourism from mainland China and from other parts of the world. These shops and large malls no longer have the footfall and business has dropped off a cliff. That’s forced a number of closures and other difficulties. To stave of bankruptcies in this area and elsewhere, there has been a lot of government support.

If you look at the first four months of 2020 in Hong Kong, the actual court windings up were about 25; the first four months of this year it’s 96. You can see it that even though there have been lots of steps taken to mitigate the impact, there is a marked difference between the pre and post Covid-19 era.

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

It’s been an interesting approach from the Hong Kong government. We had Covid-19 earlier than in the Western economies so the government reacted earlier and went through a few additional phases. It started off with providing direct support for businesses. For example, in Hong Kong there was a scheme where the government provided funding for about 50% of the wages for six months. The understanding would then be that if a business received that support, staff would not be dismissed. This rapidly evolved into the prodding of the banks to inject additional liquidity.

Easing reserve requirements for the banks made it easier for them to advance loans to businesses, extending government guarantees for small business loans etc. But even those loans are not done by the government but by the banks. For example, you ask for a loan and it’s approved and the right conditions are met, that loan will be guaranteed by the government, but it’s still your obligation to repay the loan – the guarantee is there to protect the bank. It’s more of that type of support in Hong Kong, along with some targeted relief to specific sectors again, just to try to protect various industries in Hong Kong. In the UK and France, government intervention has been really noticeable. But here it’s done more via the mechanism of the established financial sector.

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?

Like Richard, I doubt there is going to be a huge number of insolvencies. They will certainly be increased compared to the previous couple of years. But either way, I think there will be an increase in M&A activity. One of the interesting aspects of M&A is the due diligence side.

We were talking earlier about what government is doing to help businesses with Covid-19; in Hong Kong investments in the vaccination process itself was a major aspect – they’ve very quickly secured enough doses for everybody. The government has a very good, efficient mechanism for delivering it.

That now links with the M&A process and ensuring there’s a roll out of wider vaccine adoption that will help businesses and investments in the context of the environment where, currently, without widespread vaccination, people are not easily able to travel. Looking at the risk analysis of that investment and what could go wrong and how you stress test that investment becomes even more important than it used to be given those travel constraints.

One of the things that we are able to do in this part of the world, particularly in assisting a European company that’s about to get into an M&A deal, is that we are boots on the ground.

We can do that analysis for them and give them some comfort. In the past they may have flown out to executives from their own jurisdictions, but in the absence of being able to do that without massive complications we are an additional resource to help them go through the M&A process.