Richard Jadot 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?

The massive aid injected by the state in the economy, resulting from the “whatever it costs” rule, has significantly reduced the level of pre insolvency and insolvency proceedings in France in 2020, and the trend has continued during the first half of 2021. This state aid has consisted mainly in the so-called state guaranteed loans of up to euro13 billion, the deferral of taxes and social security charges up to euro27 billion, a solidarity fund for euro13 billion and partial activity indemnification for euro23 billion (source Deloitte).

There have also been regulatory measures such as the freezing of insolvency data tests in March 2020. All this has generated a dramatic reduction of insolvency proceedings in France, resulting in the lowest historical level of insolvency proceedings; a decline of 38% compared with 2019. For the record, it is interesting to note that the 2008 financial crisis generated an increase of 20% in insolvency proceedings, an illustration that state aid has made a significant difference compared to 2008.

All sectors were impacted: construction 23%, commerce 22%, services 14% and restaurants, hotels, bars, 13%. Overall, the impact was more on large companies above 500 employees with a turnover exceeding euro15 million, so the protection of the state as been more for small and medium size companies to date.

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

The French government is very present and has always been, but this time for a good reason. The symptoms and the position seem fairly similar to the UK. Clearly the massive state aid injections have enabled the economy to survive. However, the French government is passing messages that the “whatever it costs” principle will progressively decrease.

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. A number of companies had the benefit of “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 is going to stop and they will have to face the consequences.

It is hoped that the Government will not brutally terminate its support, which would result in annihilating the positive effects of the management of the crisis. Delays of repayment of State guaranteed loans and claims of “big creditors” (taxes, social security charges etc.) will be key. As far as businesses that have relied on state guaranteed loans as a survival mean – although they were not meant to survive – one can anticipate that there will be an increase in insolvencies among these.

Generally, it is reasonable to anticipate that the level of pre-insolvency and insolvency proceedings will increase some time at the end of 2021 and in 2022.

The capacity for companies to adapt their activities in an environment which has radically changed in a number of sectors is an important, if not crucial, factor. This is obviously the same for companies in the UK and globally in a similar situation.

The optimistic way of seeing things is to anticipate a strong rebound of the economy locally and globally, new businesses thriving and very active finance and mergers and acquisitions markets.

In France one should also not neglect the context of the presidential elections in 2022, and possible social troubles, making it even more likely that the Government will continue to support the economy strongly.

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?

It was predicted that a tsunami of insolvency proceedings would happen at the start of 2021. As often things have been different thanks to government support. It is now predicted for the end of 2021 and beginning of 2022, but no one knows what will really happen. Many predictions have been made but one should not consider that we are at the end of it.

We will see how it goes in the autumn with the pandemic. Hopefully, the vaccination roll-out and measures of the various governments will help to finally resolve all this. But we are not there yet. What we can realistically anticipate with regard to France is that there will be a lot of business failures, with an increase of insolvency proceedings by the end of this year. State aid will come to an end and companies’ cash flow problems will become more difficult.

That will in turn trigger an increase in M&A activities, and also of companies that are emerging from this period relatively successfully.

So, what are we doing as advisors? We need to be seen to be trusted advisers. We have made an alliance with finance consultants to be able to assist clients – not just on the legal aspects but also on financial and accounting issues. We put in place a fiduciary activity, the so-called French FIDUCIE which is the equivalent of a trust that enables businesses to structure schemes by isolating assets in a fiduciary entity for restructuring and protecting them from creditors and for putting in place innovative financial schemes.

As a whole, we are working on being able to assist (i) on legal and financial aspects of transactions on a tailor made basis, and (ii) resolving financial difficulties in a constructive and innovative way.