Founder: Turnaround Talk
As informal restructuring becomes more popular, there are definite trends that are developing around the world.
As is commonplace in South Africa, our restructuring environment is heavily influenced by these trends. PricewaterhouseCoopers recently released a report which discusses these trends in more detail.
We will focus on the first three trends in this featured article. The final two will be discussed next week.
Trend one: Brakes on restructuring coming off
While the impact of the Covid-19 pandemic is receding, the coming year presents a fresh set of challenges as businesses deal with the withdrawal of government support and shift from stabilise and survival mode to longer term recovery and growth. Insolvency and restructuring have been subdued but are expected to pick up as we move into 2022 and beyond Government relief and credit moratoria, support from banks and other lenders, and the huge availability of capital at low interest rates have largely held back insolvency and restructuring activity throughout the pandemic.
This combination of state support and readily available capital has made amend-and-extend or refinancing the clear and preferred solutions in many situations to date. The abundance of capital and pressure to put it to work mean that a lot of these refinancing agreements have been covenant-lite. Where there has been insolvency or more comprehensive restructuring activity, it has tended to be either sector (e.g., those most affected by the pandemic such as retail, hospitality and travel or ESG-related such as in mining and energy) or situation specific (e.g., fraud or businesses suffering from volatile commodity price and supply chain issues). However, the extent of government relief has varied. Some countries, such as Mexico, have held back on government stimulus amid continuing austerity.
Others may have wanted to inject more support but have been constrained by elevated levels of sovereign debt going into the crisis. In turn, even with government relief, some economies such as Turkey and Hong Kong have seen high levels of insolvency even during the pandemic. As government support measures start to be withdrawn and temporary loans come due for repayment, the brakes on insolvency and restructuring activity will begin to come off. Overleveraged capital structures will need to be addressed and maintaining lender forbearance and support could also become more challenging, particularly in sectors where the prospects for recovery and long-term growth are less clear. Some countries, such as Malaysia and Greece, are expecting an offloading of non-performing loans by banks to special situation funds which in turn may drive a more aggressive approach to recovery. In addition, some markets are seeing an influx in non-bank lenders for the first time, such as New Zealand.
Further risks include the high level of fiscal debt after many governments borrowed money to help support businesses during the crisis. The debt burden means that the scope for further state aid in the event of fresh surges in infection could be limited. The risk is especially marked in countries where government debt was already high going into the crisis. This includes a number of major economies such as France and Japan.
Some economies are already seeing a resulting uptick in insolvency activity, particularly in the mid-market.
Activity could accelerate even faster in less developed markets where there is less resilience and low Covid-19 immunisation rates could hamper recovery and heighten the dangers of a renewed wave of infections. However, in most markets there will be a lag, though we would expect to see a step-up through the course of 2022. At the other end of the spectrum, exceptionally rapid recovery and plentiful capital for refinancing may prevent any significant surge in insolvencies in some markets such as the US.
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Businesses at the centre of the restructuring radar include those in sectors most severely affected by lockdowns and travel restrictions including tourism, airlines, hospitality and bricks-and-mortar retail. Other focus areas include sectors already feeling the impact of the move to Net Zero such as mining and energy as well as those experiencing growth pains as they emerge from the pandemic (spikes in demand, supply chain issues, labour shortages, commodity price volatility and inflation).
Priorities ahead
• Companies need to re-appraise and shore up their liquidity and working capital requirements to address the unwinding of government support and debts accrued during the pandemic, while at the same time meeting renewed customer demand and delivering delayed investment.
• The likely limited availability of further government support in some economies will increase reliance on existing lenders, shareholders and access to the capital markets, which may be less forthcoming in sectors where the prospects for recovery and long-term growth are less clear.
Trend two: Uneven Road to recovery
Focus is shifting from survival and stabilise to recovery and growth.
While the momentum for global economic recovery is gathering overall, the pace looks set to vary between countries and sectors.
One key factor is progress on vaccination. While rates tend to be lower in poorer countries, a number of advanced economies are also lagging.
The speed of recovery within and between sectors also differs quite markedly. Airlines and tourism will take time to get back to pre-pandemic levels, particularly in economies where there are continuing travel restrictions affecting tourism businesses such as Australia, Japan and New Zealand.
Other sectors such as hospitality and retail may come back more quickly as restrictions ease – for example in the US, many such service enterprises are already bouncing back and even exceeding pre-pandemic levels in some cases. Additionally, whilst consolidation in some sectors has been seen to date, more is expected through further M&A activity as players start to capitalise on growth opportunities.
In economies where the rebound is furthest forward, the business focus is moving from short-term survival to recovery and growth, bringing with it challenges in managing the associated demands on liquidity and working capital.
The speed of the rebound in some economies and resulting surges in demand could further stretch resources. And as digital disruption and expectations on ESG threaten to turn whole sectors on their head, companies face the challenge of adapting business models, securing the funding needed to finance the necessary transformation and boost value over the medium-to-long term.
Priorities ahead
• In this uncertain and potentially stop-start pathway to recovery and growth, it is essential to monitor cash and develop realistic forecasts which take account of potential varying recovery scenarios; and
• The immediate demands do not just include day-to-day expenses, but also funding for future growth and to adapt to the trends reshaping marketplaces and economies.
Photo By: Canva
Trend three: Supply chain disruption and inflationary pressures
Supply chain disruption could hold up recovery and jeopardise some businesses.
From steel to semiconductors, supplies of raw materials and finished goods, along with the capacity to transport them, are under pressure or seeing a significant rise in prices.
Severely affected sectors include construction, where disruption is causing project delays and pressure on costs and cash flows. In turn, a number of automotive manufacturers have had to curtail or temporarily shut down production altogether because of the shortage of semiconductors.
In addition, the recent increase in wholesale gas prices in Europe has had an adverse impact on the energy retail sector and is likely to lead to further supply chain pressures.
Rising raw material prices are also heightening inflationary pressures, which may translate into interest rate rises in due course. Among the prominent markets where rising inflation may be met with an increase in base rates is the UK, where there is still the possibility that rates may rise later this year rather than next year.
Supply chain issues put further pressure on working capital and emphasise the need for resilient supply chain management. For economies as a whole, the pincer of impaired output and rising inflation could slow or even derail recovery.
Alongside supply chain bottlenecks, resurgent demand is adding to shortages of key skills. We have already seen how travel restrictions have curtailed the movement of seasonal staff – from crop pickers to hospitality workers. We have also seen how many workers in shutdown sectors such as hospitality have taken up jobs in other industries and seem unlikely to return. Longer term issues include the shortage of commercial drivers worldwide, with often poor conditions, lack of diversity and an ageing workforce continuing to diminish an already shrunken talent pool and making it hard to attract new recruits. Some of the talent shortages may be temporary, especially as restrictions on movement are eased. But pay rates may also need to rise quite markedly to attract scarce talent, which could in turn add a further spur to rising inflation.
Priorities ahead
• New COVID-19 variants remain a threat to the pace and extent of economic recovery, both through the risk of further lockdown and in heightening the potential for supply chain disruption for many businesses. Supply chain resilience is therefore essential, especially in the most affected sectors such as construction and automotive; and
• Dealing with talent shortages requires long-term planning as well as short-term plugs. Pay, conditions and prospects may all need to be improved. Action to improve diversity could in turn enlarge talent pools and help to attract higher quality recruits.
It will be interesting to see how this plays out throughout the year.
