Paul Muscutt and Cathryn Williams, of the Squire Patton Boggs Restructuring & Insolvency team in London, analyse the current restructuring market with Blair Nimmo, UK Head of Restructuring, KPMG.
- The statistics for formal insolvencies have been in decline since at least 2014. Where is the work?
I think we have reached what I would term “a business as usual level of insolvencies”, i.e. insolvencies which are inevitable even in a relatively stable economy. Workflow has been consistent as opposed to buoyant. A surprising sector where there has not been as much activity as expected is in the oil & gas arena. Considering that the oil price crashed from over $100 a barrel to under $30 at one stage, there have only been a small number of casualties, largely because there were lots of cost reduction initiatives implemented with the result that the sector did not crater, despite the crash in the oil price. In addition many of the stakeholders such as the private equity community and banks remained supportive.
- Banks – are they lending/enforcing?
In the wake of the anti-bank sentiment following the financial crisis, the clearing banks have in the main been very cautious in terms of both lending and enforcement. There are more funding options than ever before and asset based lenders for example have taken up much of the slack. On the new lending front, a number of banks have remained reasonably active, HSBC and Santander being examples but, in my view, whilst banks will clearly always be a key stakeholder in lending to business they are now only one option a business has when seeking to secure finance.
- Do asset based lenders have a part to play in funding distressed businesses?
Yes, as they can put in place innovative funding structures and enable a company to leverage all its assets in a way that perhaps a traditional overdraft facility cannot.
- Which sectors do you predict will face challenges as we proceed to Brexit?
In my view this is very hard to predict. KPMG’s Brexit team has spent significant time working out which sectors may be affected but there has been little activity so far. To an extent, it has been crystal ball gazing as until we know the shape of Brexit, its full impact cannot be predicted. I had thought the movement in exchange rates would cause problems in the manufacturing and retail arenas, but that has taken time to work through and we are only now seeing inflation rise although I think we have to assume that will only get worse.
If there are issues with “passporting” following Brexit, the financial services sector could be significantly impacted and we are already seeing a number of institutions setting up bases in Frankfurt and other European cities. However, London has vast resources and expertise in the financial services sector which will be difficult to replicate elsewhere in Europe, certainly in the short term. We cannot look too far ahead here and we need to see what Brexit terms are negotiated. Who knows what could happen next, given the recent political earthquake following the general election?
- What sectors are busy at present?
There is significant opportunity in the public sector and we have ongoing assignments with a number of government agencies at present. Other areas where we continue to see growth are cross-border disputes, pensions advisory and supporting many of our restructuring colleagues in other countries. We have also developed some new technology in the working capital advisory space which will deliver significant results for clients.
- Following several high profile collapses of professional service firms in recent years, do you think there will be further restructuring/consolidation to come?
Undoubtedly. I believe some of these failures are linked to market saturation in the professional services sector. The insolvency and restructuring world for example is very different from at its height. There has been shrinkage in the volumes of work and, consequently, there is no need for as many professionals to work in the sector.
- What is your view of multi-disciplinary partnerships (MDPs)?
I can see they can serve a purpose but, leaving aside the potential conflict, I think they can perhaps close off avenues of referral, which may not be ideal given that reciprocation is an important aspect of professional services businesses.
- In recent years there has been a rise of alternative lenders and a number of non-performing portfolios have been acquired by distressed investors. Do you think such parties have the right experience to support businesses through distressed times?
Many of the players in this space have the right experience to help a distressed business and they almost inevitably use professionals like us to assist in that process. They do not generally face the regulation and public scrutiny that banks are subject to and therefore do not face the same constraints and political pressure that is brought to bear on traditional lenders in recovery scenarios. There is definitely a place in the restructuring landscape for these parties who often have a background of working in business support at banks, accountancy firms or lawyers and can bring a flexibility of approach which can make the difference in many cases.
- What advice would you give to any restructuring professional entering the profession now?
Immerse yourself in the market and make sure people in our space know who you are. Develop a brand for yourself. Make a difference where you can. My two eldest children have ended up in the business at two rival firms but, of course, they will not listen to advice from their Dad!
- What is the best piece of advice you’ve ever received?
I use a Scottish phrase – “stick to your knitting!” Always do what you are best at. No-one has made a successful career of being a Jack of all trades but master of none.
- If there was one reform to the UK restructuring and insolvency procedures you would wish to implement, what would that be and why?
Have there been businesses we have not been able to help in recent years because we haven’t got the right toolkit? No, I don’t think so. I believe we already have the legislation and procedures we need to enable us to help any business in distress. I appreciate that the government wishes to introduce various reforms aimed at improving the restructuring landscape, such as the concept of an extended moratorium. With this concept, I think careful thought will need to be given as to how a business can be funded throughout such a moratorium and how creditors’ interests can be safeguarded.
One area where I would like to improve perception is in relation to pre-packs. The misconception is that pre-packs are an abuse of the process and that the majority of businesses end up back with the former management at a knock down price, at the expense of company creditors. However in my experience, they are a very useful tool in minimising the damage to a business which needs to go through an insolvency process, but at the same time ensuring continuity of the business and the related employment whilst also protecting the interests of the creditors when administered properly. Regulation and oversight in this arena has been tightened up in recent years given the Pre-Pack Pool and SIP 16 requirements, which should give more confidence in the process and instil confidence that it is a robust system. But we as practitioners have a role to play in ensuring transparency around the process and purpose of any pre-pack. We need to be prepared to clearly articulate what we have done and why, in a manner in which the man in the street can understand.