Spotlight On...
economy. Whilst the economic recovery is slowly taking hold many businesses continue to struggle and the levels of SME debt continue to be unsustainable. The level of enforcement against trading businesses has been relatively low through the recession due in part to the political landscape with pressure on banks to restructure trading debt rather than enforce thereby preserving employment. The
mortgage
arrears issue has been high on the political agenda and the view has been that enforcement against trading businesses would potentially have a contagion effect into the mortgage books with employees losing their source of income. In addition, crystallising losses on the trading books would have impacted negatively on bank balance sheets potentially leading to the requirement for additional capital.
The economic cycle is improving with Irish banks now better placed than they have been for a number of years to deal with the restructuring of their business customers’ debt. There is a significant emphasis this year on dealing with overleveraged trading businesses with lenders applying restructuring solutions to nonperforming loans, for example, tranching the debt with zero coupon B notes and in some cases taking equity positions.
The banks exiting the market are taking a somewhat different approach to SME debt rather encouraging their customers to seek to refinance their debt with another bank. This represents an opportunity for the domestic banks to acquire new customers but there is a fundamental issue for SMEs finding the necessary equity to bridge the loan to value gap when seeking new funding. A number of funds have entered the Irish market expressing interest in distressed trading businesses. To date very few deals have happened for a variety of reasons not least of which is that actual deal size is too small to be attractive. However, the funding environment is improving and it is likely we will see an increase in the number of debt and equity providers entering the market either through individual deals or more likely through loan portfolio acquisition.
Examinership in the Circuit Court It is probably fair to say that a rescue culture has not developed to any significant degree in the Irish insolvency market. Our corporate insolvency processes
are dominated by liquidation and receivership which in most cases result in a termination of the business. The only formal restructuring process available is examinership and it is little used for a variety of reasons not least of which is the heavy Court involvement and costs associated with that.
In 2012 the government introduced its Action Plan for Jobs involving a range of initiatives including a review of the examinership process for smaller entities. This has culminated in the enactment of the Companies Miscellaneous Provisions Act 2013, a piece of legislation that was fast tracked and includes an amendment to the examinership legislation to allow applications for court protection to be made to the Circuit Court. In the past any application for court protection and the appointment of an examiner had to be made in the High Court. The idea behind this is to make examinership more accessible and cost effective for smaller entities. It applies to small companies that meet two of the following three criteria: < €8.8m turnover < 50 employees < €4.4m gross assets
Whilst this is a welcome development there is some scepticism among the insolvency profession and small business community alike as to whether this change will have a significant impact. The cost of the process is not necessarily the prohibiting factor for small business seeking to formally restructure, rather the lack of available investment to successfully exit the process is a problem. It is important to note that personal guarantees on corporate debt cannot be written down as part of an examinership scheme once certain protocols are followed during the process, hence, in a lot of cases small business owners do not see benefit in the process.
Portfolio Sales The improving Irish economy and more particularly the renewed confidence in the commercial real estate market have attracted a significant amount of overseas buyers. There is significant interest in Irish bank non-performing loan assets that are being brought to market in large portfolios. The secondary debt market is a relatively new feature of the Irish market but the last two years have seen approximately €30bn worth of loan portfolios transacted driven in
large part by the liquidation of IBRC. A number of other institutions have been actively disposing of non- performing loan books and continue to do so. There are numerous strategies available to the loan buyers to work out these portfolios with enforcement being just one of them. The level of enforcement activity will be driven by the degree to which borrower settlements and refinancing is available.
Asset portfolio sales are also becoming a more common part of our property market with overseas buyers wanting larger transaction sizes in order to deploy capital quickly and get a foothold in the Irish recovery. To date the bulk of these transactions have been made up of large commercial real estate assets but we are likely to see more portfolios coming to market containing both smaller commercial and residential properties in the year ahead.
Future Developments Whilst there are positive signs in the economy and certainly a sense that the frenetic activity in the insolvency market has abated somewhat there is still plenty of activity for those in the business. This will be driven by the continued deleveraging targets of the domestic banks and the requirement of the exiting banks to divest themselves of their Irish assets.
Past recessions have demonstrated a trend whereby insolvencies peak on the upswing of the economic recovery curve. This has not materialised yet in the Irish market and indeed the UK market is experiencing the same. Many believe it is down to bank forbearance and a continuing low interest rate environment. In an improving market businesses require more working capital which if not available can lead to cash shortages and ultimately business failure. This is a survival of the fittest phenomenon whereby available capital is concentrated on the most robust viable enterprises and in the long run is essential for an economy to return to health. We may well see this yet in the Irish recovery story.
Declan McDonald is a Partner with PwC in Ireland and leads the Corporate Recovery and Insolvency practice.
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