Over the last couple of years, and indeed into the first quarter of 2022, the volume of corporate insolvencies has remained relatively low. Businesses across the UK have benefitted from government backed loans and other support measures; this, combined with easy access to low cost capital, strong consumer demand and record high valuations has led to an increase in M&A activity that has suppressed restructurings.
The challenges that face businesses today are global, fast-moving and unpredictable, which makes it increasingly difficult for leadership teams to manage. From the coronavirus pandemic to the war in Ukraine, the crises facing business today feel like a series of black swan events. And whilst government measures were introduced to support businesses through the pandemic, as these start to wind down, I suspect we’ll start to see the real impact of such events on the restructuring market.
With challenging headwinds across Europe – from interest rate and energy price rises to the impact of geopolitical tensions on supply chains (both Brexit and Ukraine related) and international competition for labour supply – uncertainties remain over how much longer strong liquidity levels can support businesses that are already in distress, particularly when you consider the rising cost of borrowing over the long-term.
The cost-of-living crisis is the latest challenge. Consumer-facing businesses, such as those in the travel and leisure, retail, and casual dining sectors will most likely be the first to be impacted. Not only because discretionary consumer spending is likely to be curtailed, but also because of their exposure to the buy-now-pay-later phenomenon and the potential for increased regulation of these schemes.
It would also be remiss not to mention the importance of a robust ESG strategy when looking at the insolvency landscape. ESG is now business-critical and factored into many credit and risk appraisals. This means that businesses and management teams must continue to keep ESG front of mind and an intrinsic part of their operating model – both a challenge and an opportunity.
Directors and management teams will need to manage cash more closely than ever before. Liquidity has never been as critical, and I suspect businesses will take a more cautious approach to M&A activity.
Management teams should also pay close attention to their supply chains. We are likely to see a shift towards local supply chains and a move away from an overreliance on one or two suppliers. Businesses worldwide have seen how automotive manufacturers have been impacted by the microchip shortage, whilst the zero-COVID policy in China continues to have far reaching consequences on supply chains in Western economies. All of this means the de-globalisation of supply chains is one trend that may well emerge from this crisis.
Last year we saw the introduction of the Corporate Insolvency and Governance Act, which was introduced with the aim of providing more flexible and efficient tools to enable companies to restructure their balance sheets and operations. It’s fair to say that we’ve not yet seen the full impact of the Act given current support measures that are in place, but I’d expect to see tools such as the 20-day (initial) moratorium being used more frequently when there is a viable opportunity for the business to be rescued as a going concern.
I’d expect to see more debt forgiveness and forbearance from the banks to help businesses avoid insolvency, but it’s important to remember that such leeway is only possible when the business in question is viable in the first instance.
There will also still be lots of opportunities for hedge, credit, and debt funds. If restructuring activity does increase, then there will be opportunities to secure cheaper assets and deal activity will just shift in that regard. The fund industry’s attention will switch from business-as-usual M&A activity to stressed and distressed assets, where they will see an opportunity to buy business & assets and debt at discounted levels.
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