grant thornton

UK Restructuring Outlook 2013

JANUARY 2013

“Mostly stagnant, with a chance of debt sales”

2 Grant Thornton: UK Restructuring Outlook 2013

Contents

03 Summary of survey findings

04 Key risks to UK businesses

06 Default levels

07 Sectors most at risk

08 Restructuring strategies employed

10 Bank forbearance levels

12 Exits and enforcement levels

15 About the survey

16 Contact us

Grant Thornton: UK Restructuring Outlook 2013 3

We surveyed over 230 leading UK restructuring, origination and portfolio bankers, asset based lenders, restructuring advisers and senior turnaround professionals. Here is what they said about the outlook for underperforming businesses in 2013.

“Many think that 2013 will be similar to 2012. I agree that bank strategies will be broadly similar to last year and that corporate failures may well remain artificially low. However, as the UK economy stagnates for another year, I expect that more management teams will come to the realisation that they need to adopt alternative funding strategies and that they have some hard decisions to make. Companies need to use 2013 to focus on business improvement.”

Mark Byers, Partner, Global Head of Restructuring

67% of respondents say that stagnant/slow growth is the primary risk to UK businesses...and 80% see no recovery in 2013 The perception of risk has shifted from the Eurozone debt crisis, which was viewed as the primary risk in 2012, to the impact of prolonged stagnant/slow growth on UK businesses. In line with this, 80% of respondents see no real economic recovery in 2013.

45% expect defaults to increase in 2013 compared to 2012...and these are likely to be very sector focussed The risk of default continues to be very high in 2013, with 45% of respondents expecting an increase. As we have seen with Blockbusters, HMV and Jessops recently, retail is considered particularly vulnerable in 2013, with more than 84% of respondents rating it as having lower resilience. This is closely followed by hotels/pubs/leisure (83%), printing (77%), property/construction (72%) and haulage/logistics (61%).

Revenue pressure is the key driver of underperformance...but cost cutting continues to be the favoured restructuring tool When asked to rate the contributory factors that led to distress in 2012, declining revenue ranks highest, yet cost cutting remains the primary focus

of most restructuring efforts. More far-reaching restructuring options are often overlooked.

61% expect the same level of bank forbearance in 2013...and lender reputation and perceived Government influence over nationalised banks are key drivers Respondents expect to see similar levels of forbearance in 2013. Respondents also point to the long-term impact of forbearance on the UK economy, where lender support for ‘zombie’ companies creates an artificial barrier to entry for new, more competitive, entrants.

Enforcement is the last resort exit for lenders and is only employed in the minority of cases Respondents do not expect much change to the strategies that are employed to deal with underperforming loans. A significant minority expect that divestments of underperforming loan books to third parties and exits through market sale of debt will increase in 2013. Secondary loan sales to overseas funds are viewed as a key area of activity, not just in the UK but throughout Europe.

UK Restructuring Outlook 2013Summary of survey findings


67% of respondents say that stagnant/slow growth is the primary risk to UK businesses... Last year, 72% of respondents rated the Eurozone sovereign debt crisis as the key threat to UK businesses. This year, the perception of risk has shifted away from the Eurozone and towards the risk of prolonged stagnant/slow growth. 67% of our respondents now consider this as the main threat to UK businesses, followed by the Eurozone sovereign debt crisis (41%), UK austerity measures (40%) and access to debt finance (40%).

More positively, and in line with the December 2012 Autumn Statement, the impact of UK corporate tax is perceived to be lower than last year. Risks to UK businesses associated with the sterling exchange rate are also expected to be lower in 2013.

Question: Looking at the next 12 months, how would you rate the potential impact of the following macro trends on UK businesses?

“Difficult times ahead with the economy continuing to remain flat. Austerity measures to properly kick in, impacting disposable income and subsequently businesses. Eurozone collapse still not off the table....”Restructuring/recovery banker

“Limited recovery in terms of GDP improvement but restricted to certain sectors rather than wide-spread”Banker, Credit Risk

0%

10%

20%

30%

40%

50%

60%

70%

80%

UK C

orpo

rate

tax

burd

en

Ster

ling

exch

ange

rat

e

Acce

ss to

deb

t fin

ance

UK a

uste

rity

mea

sure

s

Prol

onge

d st

agna

nt/s

low

grow

th in

the

UK

Euro

zone

sov

erei

gnde

bt c

risis

2013

2012

“A slight improvement from 2012 which will slowly build some momentum for 2014.”Restructuring/recovery banker

“Initial false optimism will be replaced by a cold dose of reality.”Restructuring/recovery banker

% of respondents rating impact as 8 to 10 out of a range of 1 to 10 (10 highest and 0 lowest impact)


● Improve significantly (2%)

● Improve somewhat (18%)

● Stay the same (60%)

● Deteriorate somewhat (19%)

● Deteriorate significantly (1%)

● Improve significantly (0%)

● Improve somewhat (2%)


● Deteriorate somewhat (63%)

● Deteriorate significantly (7%)

...and 80% see no recovery in 2013

Whilst fewer respondents expect the economy to deteriorate in 2013 compared to last year, the vast majority (80%) do not have a positive outlook. The message is clear, they do not expect a real recovery - just more of the same. Only 18% expect the economy to improve somewhat and 2% expect it to improve significantly.

Respondents consider that any upside will be restricted to stronger operators, with pressures on weaker competitors increasing. Similarly, in terms of sectors, respondents expect a real mix of performance in 2013, with retail, hotels & leisure and construction being highlighted as areas of significant weakness and the manufacturing sector and exports, more broadly, being highlighted as areas of strength. Also, a number of our respondents expect that London and the South East will perform strongly in 2013.

Question: Looking to the next 12 months, do you expect UK economic conditions to...

2013

2012

“2013 will be marked by muted consumer confidence and tough trading conditions for companies without a compelling proposition. Corporates with strong balance sheets, good brands and products will build market share. Those that fail to change in 2013 will find refinancing in 2014 increasingly challenging.”

Shaun O’Callaghan, Partner, UK Head of Restructuring


45% expect defaults to increase in 2013 compared to 2012...

The survey shows that the risk of default continues to be very high in 2013, with 45% of respondents expecting an increase. This risk is likely to be focussed on a small group of sectors - sectors vulnerable to low consumer confidence and lower credit availability are considered least resilient.

Question: Looking at the next 12 months, how do you expect default levels to develop?

● Increase (45%)


● Decline (5%)

“More of the same. Consumers are being squeezed by low pay increases and rising prices, especially utilities. Lower discretionary spending impacting on leisure and retail. Property market is still sluggish.”Restructuring/recovery banker

“Whilst default levels may well stay the same in 2013, we are likely to see banks put debt and assets to market to reduce their exposure and working capital lending. We may also see more willingness to enforce by new stakeholders that have previously purchased loan portfolios or debt at a discount.”

David Dunckley, Partner, Head of Mid Market Restructuring


As we have seen with Blockbusters, HMV and Jessops recently, retail is considered particularly vulnerable in 2013, with more than 84% of respondents rating it as having lower resilience. A similar level of risk is attached to hotels/pubs/leisure, rated by 83% of respondents as having lower resilience. This is closely followed by printing (77%), property/construction (72%) and haulage/logistics (61%).

On a positive note, many sectors are doing comparatively well and are rated as having a higher resilience, including energy/utility (71%), pharma/biotech/medical devices (57%), agribusiness/food/beverage (51%) and aerospace/defence (46%).

Question: Looking at the next 12 months, how would you rate the resilience of the following sectors of the UK economy?

0% 20% 40% 60% 80% 100%

Energy/ Utility

Pharma/ Biotech/ Medical Devices

Technology/ Media/ Telecoms

Aerospace/ Defence

Agribusiness/ Food/ Beverage

Infrastructure

Financial Services

Manufacturing

Healthcare (private)

Shipping

Professional Practices

Automotive

Travel/ Tourism

Haulage/ Logistics

Property/ Construction

Printing

Hotels/ Pubs/ Leisure

Retail

Higher resilience

Average resilience

Lower resilience

...and these are likely to be very sector focussed


Pressure on revenue is the key driver of underperformance...

Question: Looking at the distressed cases you worked on in the last 12 months, what were the main contributory factors leading to distress?

0%

20%

40%

60%

80%

100%

Frau

d

Expo

rt m

arke

t vol

atilit

y

Pens

ion

sche

me

com

mitm

ents

Exte

rnal

regu

latio

n

Prod

uct s

ubst

itutio

n/ob

sole

senc

e

Publ

ic s

ecto

r cu

ts

Tax/

TTP

debt

bur

den

Incr

ease

d co

mpe

titio

n

Mor

e lim

ited/

expe

nsiv

e de

bt fi

nanc

e

Risi

ng c

osts

Inap

prop

riate

bus

ines

s m

odel

Poor

fina

ncia

l con

trol

Poor

man

agem

ent d

ecis

ions

Decl

ine

in re

venu

esContributory factors leading to distress When asked to rate the contributory factors for distress in 2012, the vast majority of respondents highlight declining revenues and rising costs. These issues are commonly compounded by poor management decisions and poor financial control.

“Although many clients in distress are taking steps to adjust their cost base, this is very often not enough. Major turnarounds in performance can only be achieved through a strategic realignment of the business that addresses changing client needs.”

Stephen Rigby, Partner, Head of Performance Improvement



Question: In the last 12 months, what type of restructuring strategies have been employed in the cases you worked on?

0% 20% 40% 60% 80% 100%

Appointment of CRO

Forbearance

Rollover with changes to terms

Exit via alternative funder

CVA

Pre-pack administration

Trading administration

Operational restructuring/turnaround

Financial restructuring

All of them The majority The minority None

Question: Looking back at the last 12 months, did your borrowers successfully implement the following?

0% 20% 40% 60% 80% 100%

Management team restructure

Outsourcing strategy

Diversification strategy

Realignment of strategy/business model

Divestments of non-core assets

Better focus on sales andmarketing

Reduction in staff cost

Better cash flow management

Cost cutting programmes

All of them The majority The minority None

Enforcement continues to be a last resort exit Respondents report that financial and operational restructurings continue to be favoured over enforcement action. Administrations, pre-packs and CVAs are seen as the last resort and are employed as such.

The survey also highlights the scarcity of re-banking options for underperforming businesses - exits via alternative funders are employed in the minority of cases or not at all. With so little fluidity in the market the onus is on lenders and their customers to work together to resolve underperformance issues.

Extent of operational restructurings is not far reaching enough Businesses and their lenders continue to favour quick solutions to underperformance. Respondents report that cost cutting programmes, better cash flow management and reductions in staff costs are routinely implemented. More far-reaching restructurings that interrogate the fundamentals of the business, its processes and how value can be created are often overlooked.

...but cost cutting continues to be the favoured restructuring tool


61% expect the same level of bank forbearance in 2013...

Banks are expected to use forbearance at similar levels to last year. This is consistent with respondents’ more stable outlook for UK corporate failure levels and their expectation that the UK economy will not deteriorate further.

Respondents also point to the long-term impact of forbearance on the UK economy, where lender support for ‘zombie’ companies creates an artificial barrier to entry for new, more competitive, entrants.

“Ordinarily, I would have expected less forbearance in 2013, on the basis that lenders may well be less likely to ‘wait and see’ and because the market for impaired assets and debt is likely to be more fluid. However, the global liquidity standards under Basel III will be critical to overall asset management strategies, including portfolio sales, and there is a high degree of uncertainty over how this will play out in 2013.” Daniel Smith, Partner, Restructuring

Question: In 2013, do you expect bank forbearance strategies to be used?

● More than in 2012 (20%)

● Same level as 2012 (61%)

● Less then in 2012 (19%)

0%

10%

20%

30%

40%

50%

60%

70%

80%

Less than in 2012Same level as 2012More than in 2012

2013

2012

20%

29%

61%57%

19%14%


When asked what will impact on bank forbearance levels in 2013, respondents point to many factors. The perceived Government influence over nationalised banks, the review of the sale of interest rate products and public opinion are considered key drivers. It is of note that only 30% point to the hope of future value enhancement as a driver for forbearance.

Question: Looking at the next 12 months, how do you rate the impact of the following on bank forbearance?

0%

10%

20%

30%

40%

50%

60%

70%

80%Ho

pe fo

r fu

ture

val

ueen

hanc

emen

t

Disp

ropo

rtio

nate

cos

t of

reco

very

/enf

orce

men

t

Base

l II &

III

Low

inte

rest

rat

es

Publ

ic o

pini

on

Revi

ew o

f the

sal

e of

inte

rest

rat

e pr

oduc

ts

Gov

ernm

ent i

nflu

ence

over

nat

iona

lised

ban

ks

“The key difference for me is the impact of Basel III, as banks wise up to the cost of capital and realise the underlying cost / impact of holding impaired assets on their balance sheet. This will drive bank strategies in 2013.”Origination/portfolio banker

...and lender reputation and government influence over nationalised banks are considered key drivers



Enforcement is the last resort exit for lenders

Question: Looking at your underperforming loans, which strategies will you employ in 2013?

0% 20% 40% 60% 80% 100%

Continue to support

Debt for equity swap

Enforcement

Instigate operationalimprovements

Exit through marketsale of debt

Divestment of underperformingloan book/or part

thereof to third parties

More than 2012 Same as 2012 Less than 2012

Respondents do not expect much change to the strategies that are employed to deal with underperforming loans. A significant minority, however, expect that divestments of underperforming loan books to third parties and exits through market sale of debt will increase, 35% and 32% respectively.

A number of respondents point to more secondary loan sales to overseas funds and expect this to be a key area of activity in 2013, not just in the UK but throughout Europe.

“I expect more loan note sales by local European banks to US based private equity funds who will buy loan to own, or loan to maturity.” Restructuring adviser


“I expect corporate failures to increase because of the lack of alternative debt funding. In some cases banks will have borne with the situation for a number of years. This cannot continue indefinitely.”Restructuring/recovery banker

Question: Looking at the next 12 months, do you expect the number of corporate failures to...

● Increase (46%)


● Decline (4%)

0%

10%

20%

30%

40%

50%

60%

DeclineStay the sameIncrease

2013

201246%

51% 50%

43%

4%6%

“I’d say that enforcement action will still be the last resort in 2013, lenders are much more likely to favour other restructuring strategies. In some cases I actually see them taking the bull by the horns and injecting cash to support turnarounds.”

Adrian Richards, Partner, Restructuring


“I expect much of the same. Some of the zombie businesses may finally go down but most will continue to trade. We won’t see a surge in insolvency until the economy picks up and interest rates rise. Then, SMEs and the smaller real estate companies and retailers will be in the firing line.”Origination/portfolio banker

Question: Looking at the next 12 months, do you expect the number of pre-pack administrations to...

● Increase (35%)


● Decline (9%)

0%

10%

20%

30%

40%

50%

60%

DeclineStay the sameIncrease

2013

2012

35%

52%56%

45%

9%

3%


It assesses the environment for underperforming businesses in the UK in 2013, provides insights into the restructuring strategies employed in the market and compares sector vulnerability. Responses were collected online from 12 December 2012 to 2 January 2013. In total 233 respondents participated, breaking down into 32% restructuring and recovery bankers, 26% origination/portfolio/credit risk bankers, 12% interim directors, 11% lawyers, 5% PE/special situations and mezzanine investors, 4% asset based lenders and 11% restructuring advisers and other market participants.

Respondents work with UK businesses of all sizes. In terms of debt this breaks down into, 8% work with businesses owing +£100 million, 11% with those owing £50-100 million, 14% with those owing £25-50 million, 34% with those owing £5-25 million and 33% with those owing £0-5 million.

About the Restructuring Outlook for 2013

This is a survey of UK restructuring/recovery bankers, asset based lenders and restructuring advisers including senior turnaround professionals.

Contact us

© 2013 Grant Thornton UK LLP. All rights reserved. ‘Grant Thornton’ means Grant Thornton UK LLP, a limited liability partnership. Grant Thornton is a member firm of Grant Thornton International Ltd (Grant Thornton International). References to ‘Grant Thornton’ are to the brand under which the Grant Thornton member firms operate and refer to one or more member firms, as the context requires. Grant Thornton International and the member firms are not a worldwide partnership. Services are delivered independently by member firms, which are not responsible for the services or activities of one another. Grant Thornton International does not provide services to clients. This publication has been prepared only as a guide. No responsibility can be accepted by us for loss occasioned to any person acting or refraining from acting as a result of any material in this publication.

grant-thornton.co.uk V22450

London Restructuring ContactsMark Byers Partner, Global Head of Restructuring T +44 (0)20 7728 2522 E [email protected]

Shaun O’Callaghan Partner, UK Head of Restructuring T +44 (0)20 7865 2887 E [email protected]

Sarah Bell Partner T +44 (0)20 7728 2409 E [email protected]

Grant McRobert Partner T +44 (0)20 7865 2119 E [email protected]

Adrian Richards Partner T +44 (0)20 7728 2001 E [email protected]

Daniel Smith Partner T +44 (0)20 7728 2139 E [email protected]

Specialist London Contacts Stephen Baker Partner, Corporate Finance T +44 (0)20 7728 3100 E [email protected]

Kathryn Hiddleston Partner, Head of Restructuring Tax T +44 (0)20 7728 2618 E [email protected]

Darren Mason Partner, Head of Pensions Advisory T +44 (0)20 7728 2433 E [email protected]

Mo Merali Partner, Head of Private Equity T +44 (0)20 7728 2501 E [email protected]

Stephen Rigby Partner, Head of Performance Improvement T +44 (0)20 7865 2101 E [email protected]

Jeremy Toone Partner, Head of Real Estate Advisory T +44 (0)20 7865 2314 E [email protected]

London Mid Market ContactsDavid Dunckley Partner, Head of Mid Market Restructuring T +44 (0)20 7728 2408 E [email protected]

Ian Corfield Partner T +44 (0)20 7865 2889 E [email protected]

Regional UK Mid Market Contacts Birmingham David Bennett Partner T +44 (0)121 232 5217 E [email protected]

Bristol Nigel Morrison Partner T +44 (0)117 305 7811 E [email protected]

Cambridge Ian Carr Partner T +44 (0)1223 225625 E [email protected]

Cardiff Alistair Wardell Partner T +44 (0)29 2034 7520 E [email protected]

Glasgow/Edinburgh Rob Caven Partner T +44 (0)141 223 0629 E [email protected]

Leeds/Newcastle Joe McLean Partner T +44 (0)113 200 1506 E [email protected]

Manchester Matt Dunham Partner T +44 (0)161 953 6495 E [email protected]

David Riley Partner T +44 (0)7775 826 394 E [email protected]

Reading Daniel Taylor Partner T +44 (0)118 983 9601 E [email protected]

Selected EMEA Restructuring ContactsFrance Jean-Pascal Beauchamp Partner T +33 (0)1 56210569 E [email protected]

Germany Heike Wieland-Bloese Partner T +49 (0)211 9524 512 E [email protected]

Ireland Paul McCann Partner T +353 (0)1 6805604 E [email protected]

Netherlands Matthieu Tak Partner T +31 (0)20547 5757 E [email protected]

Portugal Maria Mendes Partner T +351 (0)21 413 4632 E [email protected]

Russia Andrey Sorochan Partner T +7 (0)495 258 9990 E [email protected]

South Africa Gillian Saunders Partner T +27 (0)11 322 4500 E [email protected]

Spain Ramon Galceran Partner T +34 (0)93 206 3900 E [email protected]

UAE Hisham Farouk Partner T +971 (0)4 268 8070 E [email protected]

grant thornton - uk restructuring outlook 2013

Documents

grant thornton international

asset based lenders

considered key drivers

respondents rating impact

default continues

key area

basel iii