José María Dutilh 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 are seeing a considerable increase in the number of business insolvencies in Spain. This is expected to grow by 49% during 2021 as soon as the aid approved to curb the pandemic’s impact on the economy comes to an end, and which has managed to stave off this increase in the meantime.

The slow recovery of GDP in some countries such as Spain, the UK and Austria, compared to the contraction sustained during the pandemic, will increase pressure on business insolvencies.

Tourism and hospitality, textiles, clothing and footwear, automotive and components, petroleum, and the leisure and cultural activities sectors have suffered most from the effects of the Covid-19 pandemic and are expected to take three years to recover.

This is shown in an analysis carried out by the DBK sectoral observatory of Informa D&B, a subsidiary of CESCE, regarding the coronavirus’ impact on the Spanish economy. This analyses more than 600 activities included in the National Classification of Economic Activities (CNAE), grouped into 36 sectors.

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

During summer, the government will be preparing measures that would consist of inducing companies to restore their activities rather than continuing to rely on aid. There are a number of companies that are comfortably sitting on the easy money, some for good reasons and others for less good reasons. Consequently, the government is progressively instilling the idea that at some stage it’s going to stop and they’ll have to face the consequences.

With businesses that have relied on state guaranteed loans to help them survive – although they were not meant to survive – there is going to be an increase in insolvencies among these. They’ll wake up to the realisation that big state loans will have to be repaid and that’s going to a hurt a lot of people running businesses that were struggling before the pandemic.

The capacity for companies to adapt will therefore be an important factor.

The main measures adopted in Spain since the beginning of the pandemic, aimed at companies, include:

• First guarantee lines by the Official Credit Institute (ICO) to guarantee 70%/80% of loans granted by Banks (€100,000 M).

• Second guarantee lines by the ICO to guarantee 70%/80% of loans granted by the Banks (€40,000 M).

• Extraordinary coverage line by the Spanish Export Credit Agency (CESCE) for export credits.

• Line of direct aid for the self-employed and companies (€7 billion).

• Measures to support and flexibilise loans with public guarantees (€3 billion).

• Recapitalisation fund for companies affected by COVID-19 (€1,000M)

• Recapitalisation fund for “strategic” companies (€100,000,M)

• Temporary collective labour suspensions (ERTEs) due to force majeure (closure) and exemption from Social Security contributions during the ERTE.

• Extension of ERTE due to force majeure (reduction of activity) and exemption from Social Security contributions during ERTE

• Rebates on social security contributions for workers with permanent seasonal contracts.

The aid packages offered by the government represent a relief and rescue measure, but not for all companies. They offer some help for very specific situations.

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?

The pandemic outbreak in March last year had an impact on global economic activity.

This increase in the value of mergers and acquisitions in a context of global crisis highlights the region’s attractiveness for investors interested in large-scale operations. Examples of this include the transactions carried out by national companies, whose operations place Spain as the third country in terms of transaction value (2,127 million euros).

Experts believe that, as the vaccination process proceeds, the second half of 2021 is likely to offer a more stable environment for new M&A activity. However, the risks of possible new waves of contagion, international conflicts and unexpected economic crises are still present and have a direct influence on such activity.

Unlike the economy, which experts expect to take several years to reach pre-crisis levels, investment funds and banks foresee a 2021 of unbridled euphoria in Spain. So much so that they already have transactions on the table pending resolution for this year to a value of over €17,000 million.

One of the firm’s most important premises is to act as quickly as possible, since a delay in finding a solution causes even greater problems for people and/or companies.

In order to help these individuals and companies as quickly as possible, LeQuid provides financing, debt refinancing, liquidation of assets and communal properties, as well as sale of assets and lease-purchase. It also includes recovery of non-performing loans for clients, recovery of unduly paid municipal capital gains tax and resolution of corporate conflicts or blockage, among others.

Depending on the type of client and his or her needs, it is also possible to restructure debts and unify or defer them. Another option is to arrange out-of-court refinancing, including agreements with creditors or the sale of assets. The Spanish legislation foresees a wide range of instruments to overcome these situations; pre-insolvency, scheme of arrangements, sale of business units, Creditors Agreements.

The above also applies to individuals (either shareholders or administrators) who have granted personal guarantees to cover company obligations (Extrajudicial Payments Agreements and Voluntary individual bankruptcy procedures aimed to either defer payments, and or reduce payments and exoneration of outstanding debts).

At LeQuid, we believe in second chances.


Contributing Advisors