Crowe Expects Consolidation After Pandemic Recedes
Aiden Murphy has over 25 years’ experience working in corporate finance, and has spent the last 10 years heading up the corporate restructuring and insolvency team at Crowe. “Having worked across many industries and sectors and completed hundreds of business restructuring plans, I can quickly ascertain what the best options are and the likely outcomes,” says Murphy. “Through my experience I can find if there are viable aspects of a business to save and from that, outline a workable solution to the business owners. This provides the clarity they need and the springboard for a successful turnaround of the company.”
In Murphy’s view, today’s business challenges are different from previous recessions. He explains that the pandemic has somewhat divided the business community into those that have resources to bring digitalisation to the fore of their strategy and those that do not.
“Companies that have struggled to make the necessary investment prior to the pandemic have seen their resources depleted and so stand weakened today, while those with more modern equipment, streamlined processes and a digital communication infrastructure have been able to adapt better,” Murphy explains.
He expects that this will lead to a wave of consolidation within the sectors particularly affected by the pandemic. There will be an increase in acquisitions and mergers, which will result in a transfer of any viable assets and trading lines from the company acquired and the liquidation of the remaining business.
“What will emerge are stronger and more efficient businesses retaining as many staff as possible,” Murphy predicts. “The timing of this is likely to be from September onwards as government supports are withdrawn. However, the smarter business owners are moving faster than this and the work is starting now. At Crowe we are seeing mandates coming in for businesses looking to acquire, sell and merge with others in their sector.”
Murphy argues that the pandemic’s unique circumstances, and depleted company reserves, creates the need for longer repayment plans for Covidrelated debts. “It would help if Covid19 loan guarantee repayments could be available for a period of up to six years, and if warehoused revenue liabilities were available for repayment interestfree, over a five-year payment plan.
“Unless we fully grasp the problematic balance sheet position of the majority of businesses in the hospitality sector, these businesses will not be able to return to solvency, and will thus be forced to consider liquidation,” he warns.
In Murphy’s experience, the big mistake that directors often make is to put money into a failing business, before they have dealt with the legacy creditor position. “This is where help from an expert in restructuring is a vital ingredient.”
Murphy adds: “At Crowe once we formulate and implement a plan we can be more direct in dealing with creditors. In our experience, creditors tend to fare better and receive a higher dividend when the business is restructured rather than allowed to fail. Once this is explained to them, we usually end up with a significant proportion of creditors onboard with the proposed restructuring plan.”
Murphy is a SCARP enthusiast. “It will be a very welcome addition to the toolkit of insolvency practitioners.” Crowe expects this new process to be extensively used by qualifying businesses to help purge balance sheets of unaffordable creditor debts, making them attractive again for renewed investment.
“Once the legislation is enacted, we have the programmes and models available to project cashflows and calculate the creditor dividend levels, new investment requirements and funding sources that would lead to successful SCARPs.
“This new rescue process can be completed at a fraction of the cost of an examinership, making it easily affordable for most businesses, and it achieves the same result as an examinership – ensuring that a solvent and viable business emerges.”
‘We are seeing mandates coming in for businesses looking to acquire, sell and merge’
Government supports and creditor forbearance have put many businesses in a wait-and-see holding pattern. However, for any businesses considering a formal rescue procedure, such as examinership, or SCARP when introduced, Stephen Scott at Smith & Williamson advises that preparations should begin without delay.
Scott is Head of Restructuring & Recovery Services at Smith & Williamson, which is part of financial and professional services group Tilney Smith & Williamson. He has almost 25 years’ corporate recovery experience and is a founding member of the Irish Society of Insolvency Practitioners and sits on its Law Reform Committee.
“When the supports are withdrawn, affected businesses will face decision time on their future viability,” says Scott. “This will depend on a number of factors including their financial strength entering the crisis, the sector they operate in, stakeholder support and the resilience of their operating model.”
In Scott’s view, restructuring activity will undoubtedly increase significantly. “This will entail difficult operational restructuring decisions, financial restructuring of balance sheets, negotiated agreements with landlords and creditors, formal rescue procedures and, unfortunately, liquidations for unviable businesses,” he explains.
Notwithstanding the sudden and unprecedented nature of the current crisis, tried-and-tested restructuring advice still holds true, according to Scott. “Early engagement with restructuring professionals is essential, allowing as much time as possible to assess the position and put in place a strategy before it is too late. Operational, working capital, cash generation and financing strategies may take some time to implement and benefit from,” he adds.
“Directors should ensure that quality accurate management accounting and short-term forecast information is readily available. This will be crucial in relation to internal decision making, for the third-party advisers and finance providers, and if any formal rescue procedures are being considered. Directors will also have to consider communication with key stakeholders including lenders, customers, creditors, Revenue, shareholders and employees.”
Smith & Willamson assists distressed clients with informal arrangements with creditors, and Scott expects such activity to increase after the summer and into 2022. “The insolvency infrastructure isn’t directly relevant to informal arrangements, which will be through direct negotiation between the relevant parties,” Scott explains.
“However it does play an important indirect role, as each party will have to assess their position if negotiations fail and formal insolvency procedures come into play. For example, landlords will also have to assess their alternative position should negotiations fail and the tenant company enters examinership or liquidation.”
When company liquidation is contemplated, Scott stresses the importance of engaging the services of experienced insolvency experts to ensure that the process is run properly. “Priorities for responsible directors will include being assured that all options will be explored in order to maximise the commercial return achieved for creditors, and that key aspects such as employee statutory claims are dealt with promptly. Other important factors are communication with creditors and other key stakeholders, overall case progression, and that clear competitive fees are charged.”
Scott’s other advice to directors is to be aware of guidance from the ODCE which addressed directors’ concerns in relation to potentially facing restriction proceedings if the Covid crisis led to the insolvency of their companies. The guidance indicated that the ODCE will generally grant relief to liquidators from their obligation to make a restriction application in cases where the available evidence clearly demonstrates that a company director has acted honestly and responsibly in the conduct of a company’s affairs.
“Factors the ODCE will consider include whether appropriate professional advice was sought, the adequacy of financial information, the treatment of taxes, and the basis upon which the directors formed the view that the company would be able to trade out of its difficulties within a reasonable timeframe,” says Scott.
‘Directors should ensure that quality accurate management accounting is readily available’