Trends in restructuring and insolvency – the banking view
Kevin Booth, UK head of business support, Barclays Corporate I
t is generally recognised that throughout the 2008/9 recession and during its immediate aftermath, there have been less corporate insolvencies than many analysts first predicted when the economic downturn began. More so given the pace and the severity of decline compared to previous recessions. There are a number of reasons for this: the response from business where management teams have been galvanised into decisive action, the behaviour and approach by lenders where there has been a much greater focus on preserving value and thirdly the financial support initiatives from government, including rapid and material reduction in interest rates to historic lows, quantitative easing, HMRC time to pay initiative and the temporary reduction in VAT rates at an important period when consumer confidence was fragile. All of these actions individually and collectively have helped ameliorate corporate insolvency rates when compared to previous recessions. Within Barclays Corporate our business
support team has experienced these observations first hand. Our early engagement model has enabled us to quickly increase the investment in the team when we saw the increased flows of stressed businesses coming into the team during 2008. Through early engagement, both bank and business have more options to preserve existing value in the company and help return it back to strength by working with the owners, management and other stakeholders to reduce its debt to realistic levels and restore the confidence of the myriad stakeholders through a robust and concise leadership strategy. Through this approach, we quickly stabilised
our portfolio throughout 2009, particularly within our London team, putting in place a wide range of restructuring solutions over the past 18 months or so. With new inflows slowing since spring
24 November/December 2010
this has resulted in fewer client relationships being managed by this team throughout 2010, with our restructuring team reducing in size by approximately 30% over the last few months as a result.
Our regional business support team have also been incredibly focused on turning around clients, but in regional centres new case inflows have continued at a steady rate throughout 2010. We have therefore kept the team infrastructure at a high level to support this portfolio through a longer recovery cycle, particularly in the north and across the south west, where additional investment has gone into the teams.
A contrasting trend has also emerged in 2010, where larger companies have been able to adjust quicker to downsizing where required and may have access to new capital/private equity markets. Smaller businesses, however, tend not to have the same operational and financial flexibility to adjust to any prolonged downturn in the same way. This is what we are experiencing in our portfolio. This is where HMRC continue to have a crucial role to play. Many of these smaller corporates and mid-size businesses have taken advantage of the time to pay scheme, which for many has been the only remaining source of additional working capital at an important time – the cash that has allowed them to keep trading and keep people in jobs. A risk now is that HMRC attempts to unwind
the programme too quickly. There are some signs that they are beginning to show less leniency in their approach and toughen their stance towards companies in the scheme. This is perfectly understandable, but they need to ensure the balance is right and not push too hard too quickly as there may be unintended consequences. In our experience some businesses in the scheme remain in a fragile state as we move into 2011. There are also other headwinds still to navigate through over the next couple of years.
Business Money
In particular the full impact of public sector cuts has yet to be felt across direct corporate revenues and also public confidence and consumer spending habits, both of which could adversely affect corporate stress and insolvency rates. These factors are perhaps why some informed bodies such as R3 are predicting a slight increase in corporate insolvencies in 2011. That said we have not yet seen the usual seasonal inflow of new referrals into our business support teams that we normally experience at this time of year, which would suggest the headwinds referred to above have not yet translated into signs of corporate stress.
So as we head into 2011 we are not predicting a double dip and we are not anticipating corporate insolvencies climbing rapidly, as we see a slow, prolonged recovery as the most likely scenario. However we are nevertheless prepared for some downside if government spending cuts have a major impact on business failure and unemployment figures rise. In any scenario, however, the standard principles of early engagement with banks and ongoing dialogue are still the best tools to prevent insolvencies.
Kevin Booth, UK head of business support, Barclays Corporate, tel: 0800 015 4242
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