Director: Corporate-911
We have seen the rise of restructuring and the tailwinds that are driving its increasing popularity. While there has not been a lot of restructuring activity over the past two years (2020 and 2021), we will most certainly see increased activity over the next five to 10 years.
The future is simple, restructuring will become an ever increasingly popular alternative to business rescue and liquidation.
This is being influenced by the Covid-19 Pandemic which has had a telling impact on most countries. I recently read a report by PricewaterhouseCoopers which focused on the different restructuring themes from countries around the world. In this article, I will focus on South Africa as well as the UK and the US.
This is very important for us as BRPs and turnaround professionals as it guides the development of our business and the services that we offer our clients.
South Africa
The report points out that the pandemic hit South Africa at a time when many businesses were already under substantial economic and financial strain. While there has been limited restructuring activity as a result of lender support, we expect it to grow in 2022.
The South African economy was already in recession before Covid-19 hit and shrank by 6.4% in 2020. Constraints on government finance have limited its ability to cushion the economic impact of the pandemic. Although the economy began to grow again at the beginning of 2021, unemployment hit record levels in Q2. Civil unrest in some regions followed.
The report adds that, nonetheless, restructuring activity has been muted. Through the pandemic, lenders and creditors have supported businesses by providing waivers and extensions to debt service. South African corporates tend to be less highly leveraged than European counterparts and have more experience in dealing with volatility. They have therefore been agile in navigating the changing environment.
Liquidations were 25% down in the first half of 2020, but increased substantially in the second half of 2020 to 24% above 2019 levels. They returned to 2019 levels in the first half of 2021.
Photo By: Canva
The report points out that we saw a substantial increase in provisioning by the banks in 2020, but a number of the lenders have started to unwind some of these provisions as the outlook improves. Lenders are seeking to maintain a balance between balance sheet protection with wider social and developmental obligations.
The slow vaccination roll out will weigh heavily on economic recovery. As a result, we expect to see an increase in restructuring and insolvency activity and distressed sales in 2022, as trading fluctuations and working capital pressure continue.
Investment opportunities
The report adds that M&A activity in South Africa has been relatively subdued compared to more developed markets, with the jury still out on whether we will see a similar trend here. We are also seeing an increased focus from financial markets on ESG, particularly on environmental considerations as debate around the energy transition gathers momentum. The transition could potentially open up attractive investment opportunities, but also increase the cost of capital for those on the wrong side of the environmental push.
Sectors under strain
The report points out that the pandemic has added to the strains on property, business services, manufacturing, hospitality and tourism sectors. The latter has been especially hard hit as a result of many countries tightening restrictions on travel to South Africa, although these have recently been loosened by many countries. At the same time, certain sectors have performed well, such as those linked to rising commodity prices, technology and some areas of agriculture.
We expect the demand for restructuring and insolvency advice to increase in the future as a result of prevailing business conditions, increasing financial pressure and the potential for further civil unrest.
United Kingdom
The report adds that we expect a further uptick in restructuring and insolvency through 2022 as government support is scaled back and the need to fund modernisation and growth heightens the pressure on business liquidity.
The UK’s real GDP contracted by 9.9% in 2020. The loss of revenue from lockdown and disruption to production and sales weighed most heavily on retail, travel, hospitality, real estate and oil and gas. However, the impact of Covid-19 has been mitigated by £0.3 trillion of government support – 16% of GDP (as of 3 June 2021). As a result, both restructuring and insolvency activity have been subdued.
The report points out that Q2 2021 saw the number of insolvencies rising by 31% from the previous quarter to reach 3,339, mainly driven by supply chain pressures in the manufacturing and construction sectors and the recent increase in wholesale gas prices which has had an adverse impact on the energy retail sector. Although insolvency activity was 10% higher in Q2 2021 than Q2 2020, this is still 27% down on Q2 2019.
Government steps back
Most government support measures (e.g. furlough, job retention) are expected to be phased out by the end of 2021. The exception is the moratorium on commercial rent arrears, which is being extended to 25 March 2022.
The report adds that the successful vaccination roll-out has driven increasing consumer confidence, most notably in the accommodation and food services sectors. The momentum for recovery is reflected in forecast GDP growth in 2021 and 2022.
The withdrawal of government support, rising commodity prices and the need to service debt accrued during the pandemic, replenish stocks and meet pent-up demand could all intensify the pressure on liquidity for businesses which have either been mothballed in the pandemic and/or are already facing strains on liquidity.
The report points out that, in addition rising inflation provides a threat to interest rates, with the possibility that rates may still rise later this year rather than next year, in an effort to bring inflation down to the Bank of England’s 2% target.
The priority for businesses will continue to be liquidity, supply chain resilience, inflation / interest rates and repayment of government-backed debt.
Legislative openings
The report points out that the new Restructuring Plan has grown into a well-deployed tool for restructuring practitioners since its introduction as part of the UK Corporate Insolvency and Governance Act 2020 (CIGA20) in June 2020. The CIGA20 measures aim to combat the economic impact of the pandemic. The Restructuring Plan draws much of its substance from the existing scheme of arrangement. The key difference is the ability to cram down creditors across one or more dissenting classes, as long as no creditor is worse off than they would be under the relevant alternative.
United States
Following a surge in 2020, restructuring has fallen back and looks set to remain low as a result of government stimulus, plentiful capital and the gathering economic rebound. The economy has largely reopened, due in part to the recent vaccination drive. The Business Confidence Index is at an all-time high, which can be seen in the M&A markets as businesses look to deals to drive shareholder value in an environment where access to capital is plentiful and interest rates are at historic lows.
Photo By: Canva
The report adds that, however, complications with the COVID-19 Delta variant could negatively impact the economy depending on the magnitude and intensity of future cases and variants.
Restructuring falls back
The pandemic initially created a surge in restructuring activity as businesses rushed to assess and modify business plans, renegotiate covenants and forbearance agreements, and increase liquidity to bolster their availability in an unprecedented trading environment.
But insolvencies fell back again. They are down 40% in Q2 2021 year-on-year, driven by the continued low interest rate environment, historic levels of government support (31% GDP) and widespread access to liquidity in the capital markets.
Bouncing back
The report points out that the Chapter 11 and restructuring landscape of 2021 YTD has looked very different from 2020. 2020 was a record-setting year and impacted several industries including the airlines, consumer discretionary (including retail and restaurants), energy and healthcare. In 2021 YTD, almost a third of all Chapter 11 filings have been in real estate as the delayed impact of the pandemic hit the industry from REITs to construction. Several of the most heavily impacted industries in 2020 have experienced a strong bounce-back, including the restaurant industry where monthly sales have now exceeded pre-pandemic levels as of July 2021.
The report adds that, despite climbing household, government and non-financial corporate debt, restructuring activity is expected to remain low for the foreseeable future. Increasing vaccination rates continue to support economic activity, and falling unemployment, low interest rates and GDP growth are indicators that, for the time being, businesses are in the process of recovering from the impact of the pandemic.
A surge of evictions following the Supreme Court’s recent dismissal of the Centers for Disease Control and Prevention eviction moratorium could dampen recovery, however the impact of this recent ruling remains to be seen.
Robin Nicholson is a Director of Corporate-911 and is a Senior Business Rescue Practitioner
