Restructuring experts in the UK have been predicting an uptick in activity for several years — but even the worst effects of the pandemic were mostly averted by the £370bn government business support package. Until now, this funding — combined with stimulus measures after the 2008 financial crisis, which ensured a long period of low interest rates — has helped to keep corporate distress low.
However, as the support is wound down, restructuring and insolvency consultancies are gearing up for their busiest year for some time.
“We have constantly been thinking the wave will break but there has been a long period of low levels of defaults,” says Peter Marshall, co-head of European restructuring at investment bank Houlihan Lokey. “Last year was active but government support meant that most economies weathered that storm.”
In December, though, corporate insolvencies rose sharply in England and Wales to reach 1,964 — a third higher than the same month of 2021, and 76 per cent higher than in December 2019, before the pandemic.
Behind these stark numbers, published by the Insolvency Service, are companies seeking help with restructuring, or advice on how to refinance their operations to avoid being forced into insolvency.
“There is definitely a pick-up in activity,” says Sam Whittaker, managing director for the investment bank Lazard’s restructuring business. “We would expect this to continue through 2023, and into 2024 and 2025.”
Marshall pinpoints rising inflation, which is pushing up costs for businesses, as the catalyst for greater company defaults. “Companies are struggling to deal with everything that is hitting them,” he says.
Inflation is also affecting consumer demand, which again has a knock-on effect, particularly on sectors such as retail and construction, which are simultaneously facing high costs of raw materials, energy and labour.
Restructuring experts expect this will continue as rising interest rates, spiralling energy costs and supply chain issues continue to squeeze company finances.
Jo Robinson, EY-Parthenon’s turnaround and restructuring strategy leader in the UK and Ireland, sees companies taking early action to address cash flow problems due to pressures on costs. “A lot of boards and management teams haven’t been through anything like this before”, she points out, given the last recession was in 2008.
“We’re starting to see distress coming through a bit more,” agrees Issy Gross, director of turnaround, financial and operational restructuring at PwC in the UK. While this is not yet widespread, as most companies still have access to cash and debt, she is concerned about what will happen when interest rate hedges drop away and companies need to refinance at higher levels.
According to Whittaker, one reason for the low level of corporate distress is that many businesses managed to refinance any outstanding debts over the past two years while interest rates were very low.
This means the new rates environment is more likely to cause issues for companies in the medium term. “The cost of borrowing has gone up and will remain higher,” he observes, adding that this will mostly affect midsized companies that lack the financial firepower of their larger rivals.
Mark Addley, a PwC UK partner in the deals team, says lenders are generally quite sympathetic to companies and willing to help where they trust the management and its longer term prospects.
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He says there is still a huge amount of deployable capital in funds that could be used to support, or buy out, struggling companies and acquire assets such as real estate.
While traditional corporate debt has been harder to find — and more expensive since the Bank of England began raising rates — private equity firms still have tens of billions of pounds to spend from their funds.
Companies with better prospects will be able to use consultants to help them refinance and restructure their operations, and even engage with the mergers and acquisitions teams to find new investors or buyers for their operations, if necessary.
But, where restructuring existing operations is not enough, more companies will fail — which means a wave of activity for insolvency practitioners could be about to start.
PwC found there were 474 winding up petitions made last November — about four times as many as November 2021, when there were only 120. In the first 11 months of 2022 there were 2,990 — over three times more than in the same period in 2021. These formal applications from creditors to shut down companies are a leading indicator of future distress and creditor sentiment, PwC says.
Gross says the distress is mainly among smaller companies: “It’s difficult to say exactly what caused that. Is it lack of access to capital? Or is it actually that people were just really knackered after the last few years and just don’t want to do this anymore?”
PwC has also invested in its team in the cryptocurrency sector, where Addley predicts further distress in future. The firm is working as the provisional liquidator overseeing the bankruptcy process for collapsed crypto business FTX.
Others see the tech sector as a new area for activity. Many lossmaking start-ups are struggling to raise new funds as their existing investors see a sharp decline in valuations.
David Fleming, a managing director in the restructuring practice at consultancy Kroll, says consumer-facing industries are becoming busiest, with several retailers already working to raise new money or look at options for the future. Some, he says, are struggling to refinance because of outstanding debts and government-backed loans. But the prospect of a recession is also looming, he says. “It could be quite scary.”