COVID-19 and the economic impact on UK businesses
The COVID-19 pandemic has left a lot of business struggling, but how bad is the overall outlook for them? We’ve spoken to Michelle Elliot CA, partner at FRP based in Glasgow, about whether we can expect a tsunami of insolvencies or if UK businesses are coping better than expected.
Michelle is a Chartered Accountant and Insolvency Practitioner with 18 years’ experience – 16 years working at a Big Four accountancy firm, advising business owners, lenders, shareholders and other stakeholders on all aspects of corporate restructuring and insolvency.
Some have predicted a tsunami of corporate and personal insolvency coming down the line. The same was predicted during the financial crisis in the late 2000s but it never really materialised. What’s your view on the outlook?
Whilst the Scottish economy contracted by 1.9% in Q1 2021, it is anticipated that it will move into recovery mode and growth is likely to be accelerated as social restrictions are lifted over the course of the next few months. Post-COVID, even strategically sound businesses have been starved of income and the working capital needed to meet the expected increase in demand. Therefore, even financially strong viable business may encounter issues with over trading and lack of working capital as the economy recovers.
Businesses that otherwise would have failed, have been artificially kept solvent due to support measures.
Whilst there is a lot of liquidity in the market, much of this has been generated from government support schemes. Many companies have taken advantage of the loan support schemes. Debt has been layered on debt and once robust balance sheets may now be unviable. We expect that most restructuring situations will require deferral, amendment and reduction of debt levels.
FRP’s monitoring of insolvency levels and credit trends suggests a large backlog of inevitable insolvencies and a correction likely once the business support measures are removed, notably the moratorium provisions. Businesses that otherwise would have failed, have been artificially kept solvent due to support measures and therefore may need some form of restructuring.
I do not expect to see significant creditor and cashflow pressure on businesses until government support and temporary insolvency reliefs are removed. The attitude and approach taken by HMRC in agreeing Time To Pay (TTP) agreements and pursuing historic debts will also be key to assessing business viability.
Notwithstanding the likely increase in insolvency numbers in the future, there are significant cash reserves on balance sheets, and this has driven an increase in M&A activity over the past year. We expect this trend will continue; accordingly, there will be opportunities for well-managed, cash rich businesses to make strategic acquisitions.
Formal insolvency numbers, both personal insolvency and corporates, have been extremely low during the pandemic. How much of this is attributable to the levels of economic support given by government and what effect has some of the other non-financial temporary support measures had?
In terms of avoiding distress and insolvency of UK businesses during the pandemic, the government support schemes have been very successful in helping businesses avoid insolvency. Typically, the catalysts for insolvency and restructuring are creditor and HMRC arrears, cashflow pressures to pay critical trading costs such as staff wages and key suppliers – the CJRS and use of Bounce Back Loan Scheme (BBLS) and Coronavirus Business Interruption Loan Scheme (CBILS) – have largely removed these pressures.
Many of the temporary support measures, such as those suspending commercial tenants being evicted from property or winding up petitions being presented unless it can be demonstrated that the company would have ended up in financial difficulty irrespective of coronavirus, are due to come to an end. How beneficial have these measures been? How will the lifting of these measures impact businesses?
These support measures have been very successful as demonstrated by the significant decline in insolvency numbers. The removal of the moratorium on landlords taking recovery proceedings and commencing eviction actions may be the tigger for insolvency and restructuring for a number of businesses. Typically, you would envisage trade creditors will be paid to terms and all other creditors on the balance sheet are essentially lenders or government backed loans, so rent arrears may be the biggest issue and key creditor for some businesses, especially those with multiple leased sites.
By the end of September 2021 when prohibitions are removed, commercial landlords will have been unable to take action for over 18 months. Therefore, it is anticipated that some landlords may take a hard line approach on tenants. Companies and directors should use the next few months to consider their options and seek professional advice.
How proactive have businesses been to restructure operationally and financially to recovery from the pandemic economic shock?
This has been dependent principally upon size and scale, management and, importantly, the nature of the business. Sectors most impacted from the pandemic such as retail, hospitality and leisure have had to review their business operations and reduce their cost base to survive. This has been demonstrated by the number of high profiles Administrations and CVAs in these sectors, including Debenhams and numerous casual dining outlets, such as Carluccios.
Our advice to businesses and their stakeholders is to maintain good financial forecasts, particularly a 13-week rolling forecast and scenario plan to understand how their cashflow will evolve in the future. Typically, the earlier potential difficulties are recognised the better the outcome and the more routes available for a possible recovery. As such, it’s important that management teams consider their options at the earliest sign of distress, even from overtrading, and prepare robust forecasts based on a number of scenarios. Stakeholder engagement throughout the process is also essential to ensure all parties understand the options available.
New legislation was rushed through Westminster last year to introduce a new moratorium and a new restructuring plan, although both had been planned for some time. The number of companies using the new procedures can be counted on less than two hands. Why is this? Do you think the moratorium and restructuring plans will have their place to play in the future?
It’s right to say that the moratorium process has been underutilised so far, but that’s likely to change post September 2021 as the threat of insolvency increases for businesses.
A number of commercial pressures are likely to come to a head by autumn that have largely been delayed by extensions to the government’s emergency COVID support schemes, which explains the limited use of the moratorium process. Firms are now being asked to repay their emergency loans, BBLs and CBILS, at a time when they are getting back to full capacity and understandably have little by way of a buffer in terms of working capital. Creditors and landlords will also be in a position to start pursuing winding up petitions and evictions again by the end of September – creating something of a perfect storm.
The moratorium will provide firms – particularly those whose balance sheets have only been substantially impacted by COVID – with some room (20 days minimum) to find a solution with the support of a restructuring specialist. As the moratorium requires external professional support, by way of a CRO, it is unlikely to be an option for smaller SME businesses.
To date, the Restructuring Plan option has been used by a handful of very large corporates, mainly based in London. The professional costs, particularly legal costs, associated with Restructuring Plans which require several court hearings suggests they will mainly be utilised by large corporates. The nature of Restructuring Plans in implementing court driven consensual agreements with various debt funders and creditors is such that they will be better suited to larger, more complex situations.