It’s been a long 15 months. A recent FT report suggests that almost 100,000 more businesses were in significant financial distress in the first quarter of this year compared to the previous quarter, despite the moratorium on winding-up proceedings linked to COVID-related debts. Furthermore, out of 400 UK business leaders surveyed in a report undertaken by PwC, 55% anticipate a liquidity shortfall in the next 12 months, 62% expect to find it challenging to receive a clean audit opinion in the coming year, and 63% expect to be unable to service debt payments. Many are not using tools that could help. 61% have not produced 12-month forecasts that plan for a range of best and worst-case scenarios. Of those who have, only 49% are proactively working to mitigate the risks identified as part of their worst-case
The future of many businesses will come into sharp focus as the economy recovers and government support initiatives draw to an end,
Such support has come in several forms. Furlough measures, VAT deferrals and assistance in making finance packages available, as well as moratoriums on creditor/landlord enforcement action and the relaxation of wrongful trading rules, have all been instrumental in helping many businesses stay afloat in what has been an incredibly challenging period for many.
However, these packages are unlikely to last for much longer and businesses will have little alternative but to attempt to return to some sort of normality. Many however have cut costs and headcount, have far fewer resources than a year ago, and some have significant levels of increased debt as a result of the lockdown which will need to be met.
Will creditors and landlords continue to wait for their money? Clearly, any enforcement action may be meaningless if it does little more than result in a failure of a business. In that way, all stakeholders could potentially lose out. There are some creditors who might consider, however, that especially where only relatively small sums might be owed, they might stand a reasonable prospect of being paid by applying pressure on those businesses whose doors have fully reopened for business and cash is being generated again. This is especially likely in the case of retailers.
However, having provided so much support, the government will surely want to do as much as they can to ensure a ‘soft landing’ once things return to normal. A wave of insolvencies is probably the last thing that the government wants for the economy having come this far, especially with the green shoots of recovery starting to emerge.
That said, is there any way that a creditor who is determined to recover its money can be stopped in the absence of creditor action being staid for a further period? Is a landlord likely to defer taking action in the (probably unlikely) event of having another tenant ready to replace an existing one experiencing difficulties in paying rent?
There will undoubtedly be winners and losers with some sectors faring better than others. Some might recover quite well from the financial impacts of the past 15 months as social restrictions ease but others could face fundamental changes. There will also be some businesses that fail due to overtrading as pressure is put on working capital requirements, a situation experienced in previous recessions.
Access to liquidity and headroom will therefore be critical for businesses to survive and grow. M&A, MBO’s, Recapitalisations and Refinancing activity could increase substantially especially if the narratives from many experts about a significant amount of capital being ready, available, and looking for a good home, proves true.
The restructuring market could therefore become hugely popular again after a significant period of inactivity. Increasing use of new CIGA processes is apparent and more will surely follow in the ensuing months. The Company Voluntary Arrangement (CVA) and pre-pack insolvency processes are also likely to have a significant part to play.
Trustees of defined benefit pension schemes will need to carefully monitor the strength of their employer covenant and the ability to meet the challenges that will undoubtedly lie ahead, whilst at the same time trying to ensure that the interests of their members are protected. Requests for deferrals of Deficit Reduction Contributions could well resurface and trustees will need to maintain a fine balancing line between supporting these to help employers meet any financial challenges whilst at the same time assessing whether the business has a long term and viable future capable of supporting their pension scheme members. In light of the above, the need for trustees with some financial expertise cannot be understated. From March 2020-2021, business forecasting went out of the window/into the too difficult category for many companies but is now likely to be more important than ever as businesses start to recover with the crucial requirement to manage liquidity. 20-20 Trustees have significant experience in such matters in addition to the distressed, restructuring and insolvency arenas. With a wealth of M&A and transactional expertise, we would be delighted to discuss any of these areas of our business on an initial no-cost and no-names basis.