grant thornton uk - restructuring outlook for 2012

Restructuring Outlook for 2012

March 2012

Key themes for 2012

In line with this, respondents to Grant Thornton’s ‘Restructuring Outlook for 2012’ survey expect that underperforming businesses in the UK, their funders and other stakeholders will continue to collaborate, wherever possible, to save businesses through financial and operational restructurings.

However, respondents also highlighted that some business models will need a radical overhaul to survive in a low growth economy and that a restriction in credit availability, which many expect to worsen in 2012, may make this particularly difficult. Also of concern to respondents is ‘restructuring fatigue’ of management teams and stakeholders, especially in relation to companies that have been through numerous restructurings already.

Predictably, a large number of respondents caveated their responses in case of a disorderly Greek default or a breakup of the Eurozone. One respondent said memorably:

“If the Euro collapses then all bets are off”Restructuring/recovery banker

The restructuring landscape in 2012 is likely to be characterised by low interest rates, a lack of liquidity and low asset prices as well as banks’ continuing efforts to minimise losses.

2 The Restructuring Outlook for 2012

Contents

2. Key themes for 2012

3. Summary of survey findings

4. Macro-economic threats and the outlook for the UK economy

6. Resilience of UK business in 2012

8. Restructuring strategies employed

12. Refinancings, forbearance and administration levels

15. About ‘Restructuring Outlook for 2012’

The UK economy63% of respondents expect a deterioration of economic conditions in 2012. More positively, only 7% expect a significant deterioration.

Defaults and sectors most at risk75% of respondents expect default rates to go up in 2012, with retail, hotels/leisure, print, property/construction, haulage/logistics and travel/tourism rated as particularly vulnerable.

Factors leading to distressWhen asked to rate the contributory factors for distress in 2011, the vast majority of respondents highlighted declining revenues and rising costs. These issues were commonly compounded by poor management decisions and poor financial control.

Restructuring solutionsWhen asked which restructuring strategies were successfully implemented in 2011, most highlighted better cash flow management, cost cutting programmes and staff reductions. Respondents said that whilst cash control will still be key in 2012, the focus will shift towards operational restructurings.

Availability of refinancing fundsThe majority, 60%, of respondents expect the availability of funds for refinancing in 2012 to be broadly the same as in the previous year. Of note is that 56% of respondents expect an increase in the availability of distressed asset funds whilst just under 50% expect a decrease in leveraged finance.

Trading administrations/pre-packsIn line with the subdued outlook for the UK economy, 51% of respondents expect trading administrations to increase in 2012. This is, of course, from a relatively low level. The same percentage of respondents expect pre-pack administrations to increase.

Perhaps unsurprisingly, 72% of respondents think that the Eurozone sovereign debt crisis poses the greatest macro-economic threat to the UK economy in 2012, followed by stagnating UK growth and the Government’s austerity measures.

Summary of survey findings

The Restructuring Outlook for 2012 3

“There is now a greater realisation by funders that ‘extend and pretend’ strategies which are reliant on low interest rates and low inflation come with a ‘sell-by-date’ and that fixes to the capital structure, and in many cases, far reaching operational changes are necessary to create sustainable value.”Mark Byers, Partner, Global Head of Restructuring

Macro-economic threats and the outlook for the UK economy Macro-economic threats to the UK economyPerhaps unsurprisingly, 72% of respondents think that the Eurozone sovereign debt crisis poses the greatest macro-economic threat to the UK economy in 2012, followed by stagnating UK growth and the Government’s austerity measures.

The weighting given to the Eurozone sovereign debt crisis undoubtedly reflects the importance of the Eurozone export market to UK businesses, but it is also a measure of the growing sense that Europe’s politicians are failing to control the crisis.

A number of respondents voiced grave concerns over the Eurozone sovereign debt crisis and predict, if it is not contained, a crisis of confidence across Europe and globally with much greater ramifications than the contraction of credit following the collapse of Lehman Brothers. A similar number, however, were more bullish about the Euro and expect the currency to survive.

0

10

20

30

40

50

60

70

80

UK

Corp

orat

e ta

x bu

rden

Curr

ency

issu

es

UK

doub

le-d

ip

Mor

e lim

ited

debt

�na

nce

UK

aust

erity

mea

sure

s

Prol

onge

d st

agna

nt/s

low

gro

wth

in th

e U

K

Euro

zone

sov

erei

gn d

ebt c

risis

Fig 1: Looking to the next 12 months, how do you rate the impact of the following macro trends?

% of respondents rating impact as highest (8 to 10 out of range 1 to 10)

72%

59%

49%45%

36%

15% 15%


“Addressing the uncertainty in the Eurozone has to form a fundamental part of any longer term solution within the UK economy”Restructuring/recovery banker

Outlook for the UK economy in 2012In line with UK economic projections, 63% of respondents expect a deterioration of economic conditions in 2012. More positively, only 7% expect a significant deterioration. 28% expect economic conditions to stay the same, whilst 2% expect them to improve somewhat. No one surveyed expects the economy to improve significantly.

UK’s negative GDP growth in Quarter 4 2011 adds weight to respondents’ pessimistic outlook for 2012. However, respondents point to the low interest rate environment in the UK as a key life line for underperforming businesses in 2012. Also, some expect the Olympics to provide a much needed boost to the London economy and, in particular, to the leisure and retail sectors.

Fig 2: Looking to the next 12 months, do you expect UK economic conditions to

Deteriorate significantly Deteriorate somewhat

Stay the same Improve somewhat

Improve significantly* (nobody chose this option)

7%

63%

28%

2%


“I’ve been predicting more corporate failures for the last two years and it’s not happened. So although everyone is saying 2012 will be even harder I’m actually expecting a similar year to the last two”Restructuring/recovery banker

“I expect economic conditions to be challenging in 2012. This combined with lenders seeking to deleverage their own balance sheets and having limited appetite for new money will mean many restructurings will be structured to deliver a short term exit”Restructuring/recovery banker

Resilience of UK business in 2012

Default levels

The vast majority of respondents, 75%, expect default levels to increase in 2012, as conditions for many UK businesses deteriorate, with public sector cuts continuing to filter through and private sector growth remaining sluggish.

Fig 3: Looking at the next 12 months, how do you expect default levels to develop?

Increase

Decline

Stay the same

75%

24%

1%


“As defaults increase opportunities will undoubtedly arise for distressed investors, however I would also point out that many UK companies are now looking to transactions as a route to performance improvements. But in a climate of much more limited finance, companies will need to closely interrogate valuation fundamentals and the promise of synergies to return meaningful benefits to shareholders” Geoff Davies, Partner, Head of Corporate Finance

0 20 40 60 80 100 120

Energy/ Utility

Pharma/ Biotech/ Medical Devices

Technology/ Media/ Telecoms

Aerospace/ Defence

Agribusiness/ Food/ Beverage

Infrastructure

Manufacturing

Professional Practices

Healthcare (private)

Financial Services

Automotive

Travel/ Tourism

Haulage/ Logistics

Property/ Construction

Printing

Hotels/ Pubs/ Leisure

Retail

Fig 4: Looking at the next 12 months, how would you rate the resilience of the following sectors of the UK economy?

Lower resilianceHigher resiliance Average resiliance


Sectors most at risk in 2012Unsurprisingly, sectors vulnerable to low consumer confidence and lower credit availability, are considered to have the lowest resilience in 2012. More than 90% of respondents expect Retail and Hotels/Leisure and Pubs to be particularly vulnerable. Print, Property/Construction, Haulage/Logistics and Travel/Tourism and are the next most vulnerable sectors. Marginally more respondents expect the Automotive sector to have lower than average resilience, so this is another sector to watch in 2012.

Respondents rated only two sectors, Energy/Utility (71% of respondents) and Pharma/Biotech/Medical devices (53% of respondents) as more resilient than the average.

Generally speaking, UK companies in global markets can look to harness new export markets, source lower cost production and look to outsourcing to mitigate against the risks of a UK and European downturn, whilst those reliant on the domestic and European market will continue to find trading conditions difficult in 2012.

Restructuring strategies employed

Contributory factors leading to underperformance of UK businesses When asked to rate the contributory factors for distress in 2011, the vast majority of respondents highlighted declining revenues and rising costs. These issues were commonly compounded by poor management decisions and poor financial control.

0

20

40

60

80

100

Exte

rnal

Reg

ulat

ion

Expo

rt m

arke

t vol

atilit

y

Prod

uct s

ubst

itutio

n/ o

bsol

esen

ce

Frau

d

Publ

ic s

ecto

r cu

ts

Incr

ease

d co

mpe

titio

n

Tax/

TTP

debt

bur

den

Mor

e lim

ited/

exp

ensi

ve d

ebt f

inan

ce

Inap

prop

riate

bus

ines

s m

odel

Risi

ng c

osts

Poor

fina

ncia

l con

trol

Poor

man

agem

ent d

ecis

ions

Decl

ine

in re

venu

es

Fig 5: Looking at the distressed cases you worked on in the last 12 months, what were the main contributory factors leading to distress?



“Lack of liquidity in the market will dissuade lenders from exiting by administration where avoidable.” Restructuring/recovery banker

0 20 40 60 80 100

Forebearance

Rollover with changes to terms

Exit via alternative funder

CVA

Pre-pack administration

Administration

Operational restructuring /Turnaround

Financial restructuring

Fig 6: In the last 12 months, what type of restructuring strategies have been employed in the cases you worked on?

NoneThe minorityThe majorityAll of them

Financial and operational restructurings favoured in 2011Respondents reported that the majority of distressed businesses they worked with in 2011 carried out financial and operational restructures. Whilst operational restructurings have taken place in many cases, these were mostly around cost cutting and staff reductions. Banks agreed to rollover debt with changes to terms in the majority of cases. Administrations and pre-pack administrations were seen as the last resort and were employed as such. CVAs and exits via alternative lenders were employed in a minority of cases.

“With downside risks for the global economy depressing company valuations, banks will continue to favour consensual restructuring solutions over forced disposals or insolvency. However, a significant number of underperforming businesses have gone through a number of restructurings already. For these businesses the questions must surely be: Is the underlying business still viable? If so, how can restructuring fatigue be avoided?”David Dunckley, Partner, Head of Mid Market Restructuring

“More operational restructuring required as follow up to earlier financial restructurings that haven’t worked. More pain to be taken as poor businesses face up to years of excess that they can no longer carry.”Restructuring/recovery banker

0 20 40 60 80 100 120

Outsourcing strategy

Diversification strategy

Divestments of non-core assets

Management team restructure

Better focus on sales and marketing

Realignment of strategy/ business model

Reduction in staff cost

Cost cutting programmes

Better cash flow management

Fig 7: Looking back at the last 12 months, did your borrowers successfully implement the following?Restructuring strategies to deal with underperformance When asked which restructuring strategies were successfully implemented in 2011, most highlight better cash flow management, cost cutting programmes and staff reductions. Respondents said that whilst cash control will still be key in 2012, the attention is shifting towards a more focused assessment of operational deficiencies, their impact on the bottom line and the capital expenditure necessary to deal with them.

Interestingly, whilst 80% of respondents point to poor management decisions as a key contributory factor leading to distress in 2011, management team restructures were only implemented in the minority of cases. Working with management teams of distressed companies to drive behavioural and more structural changes will need to be a key area of focus for 2012.


NoneThe minorityThe majorityAll of them

“Over the last few years, especially for businesses that were not in actual payment default, the lenders’ restructuring approach was often to ‘extend and pretend’ and fixes to the capital structure were often avoided. Many of these companies will need to substantially increase their trading activity to avoid future covenant breaches. In a stagnating economy, this may well require a fundamental rethink of their business model to drive profitability and growth”Stephen Rigby, Partner, Head of Performance Improvement


“Over the last few years many retailers have failed to adapt their business model to the changes in the way that consumers shop. Where operational restructuring did occur, it was mostly reactive and focused on aligning the cost base to perceived recessionary trading levels, in the expectation that the market would soon return to 2007 levels. For many retailers, this may prove a fatal error as the current and future retail environment requires a significantly reduced physical footprint. So, the right-sizing of retailer’s store footprint will need to be a key area of focus in 2012, alongside continuous efforts to optimise their supply chain, merchandising and retail operations.” Grant McRobert, Restructuring Partner, Retail

Retail

Sectors under threat

“The last six months have seen a contraction in bank funding to the real estate sector as well as a decline in the number of potential purchasers. With fewer exit options available in distressed property situations, lenders are looking to increase, rather than just realise, the value of their security. Lenders are therefore increasingly aligning the interests of their advisors, seeking to reward on the basis of the uplift in value achieved upon exit.” Jeremy Toone, Partner, Real Estate Advisory

Real Estate

“In 2012 hotel performance will follow a similar trend to that in 2011, with London hotels outperforming regional hotels and with budget, limited service and luxury hotels outperforming the 4-star sector. The 4-star hotel business model will remain under significant pressure, with limited service hotels successfully targeting corporate business. This will be compounded by the fact that many hotels in this segment have been under invested for some time. As a result the 4-star sector is a key area to watch in 2012 as are hotel operators with significant debt servicing commitments.”Adrian Richards, Restructuring Partner, Hotels

Hotels

0 20 40 60 80 100

Distressed asset funds

ABL

Debt for equity swaps

PE finance

Shareholders

Club deals/syndicated

Bi-lateral lending

Leveraged finance

Fig 8: In terms of restructuring/refinancing existing bank debt, how much would you rate the availability of the following in 2012?

Less availability than in 2011 Same as 2011 More availability than in 2011

Refinancings, forbearance and administration levels

Availability of funds to refinance existing bank debt The majority, 60%, of respondents expect the availability of funds for refinancing in 2012 to be broadly the same as in the previous year. Of note is that 56% of respondents expect an increase in the availability of distressed asset funds whilst just under 50% expect a decrease in leveraged finance.

The expected restriction of leveraged finance availability in the market will be of significant concern, as will be the impact of the ‘wall of refinancing’ on debt markets in 2012 and beyond. At present, it is unclear how the estimated £150bn – £200bn of sub-investment grade refinancings, which will become due over the next few years, will impact on the market. Underperforming companies and those in sectors that are considered less resilient will be most vulnerable to a possible credit restriction in 2012.


“Those looking to refinance in 2012, whether by choice or necessity, are facing a changed environment. Leveraged finance is not as readily available and for some, alternative sources of finance, such as asset based lending with its lower capital adequacy requirement, may well become the funding solution of choice” David Riley, Partner, Advisory

Use of forbearance in 2012 The majority of respondents, 57%, expect the use of forbearance to remain at the same level as in 2011. A sizable number of respondents, 29%, expect banks to make more use of forbearance, whilst 15% expect a decline.

More than in 2011

Less than in 2011

Same level as 2011

Fig 9: In 2012, do you expect bank forbearance strategies to be used

57%

29%

15%


“During the course of 2012 banks are likely to be more mindful of forbearance levels especially if more severe macro-economic scenarios develop. The impact of lender forbearance and to which degree forbearance has masked an underlying risk to banks’ capital levels will only become clearer if these macro-economic threats play out.”Mark Byers, Partner, Global Head of Restructuring

“A large part of forbearance risk in the UK will be attached to residential and commercial real estate, saying this, as the use of forbearance comes under greater scrutiny by the FSA and other regulators, it will become critical for corporate restructuring strategies to deliver more than ‘just time’.”Daniel Smith, Partner, Restructuring

Levels of pre-pack and trading administrations The lack of liquidity in the market will continue to make trading administrations the least attractive option for exit. However, in line with the subdued outlook for the UK economy, 51% of respondents expect trading administrations to increase in 2012. This is, of course, from a relatively low level. The same percentage of respondents expect pre-pack administrations to increase.

Stay the same

Decline

Increase

Fig 11: Looking at the next 12 months, do you expect the number of pre-pack administrations to

51%46%

3%

Stay the same

Decline

Increase

Fig 10: Looking at the next 12 months, do you expect the number of trading administrations to

44%

5%

51%


It rates the prospects for UK businesses in 2012 and provides insights into the restructuring strategies employed in the market and the key sectors expected to be vulnerable in 2012. Responses were collected online from 9 Jan 2012 to 20 Jan 2012. In total 183 respondents participated, breaking down into 48 % restructuring and recovery bankers, 27% live side bankers, 7% asset based lenders and 18% turnaround executives and other restructuring advisers.

Respondents work with UK businesses of all sizes, in terms of debt this breaks down into, 20% of respondents work with businesses owing +£50million, 16% owing £25-50million, 36% owing £5-25million and 28% owing £0-5million.

About ‘Restructuring Outlook for 2012’

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


© 2012 Grant Thornton UK LLP. All rights reserved.

‘Grant Thornton’ means Grant Thornton UK LLP, a limited liability partnership.

Grant Thornton UK LLP is a member firm within Grant Thornton International Ltd (‘Grant Thornton International’). Grant Thornton International and the member firms are not a worldwide partnership. Services are delivered by the member firms independently.

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.

www.grant-thornton.co.uk

Contact us

BelfastBirminghamBristolCambridgeCardiffEdinburghGatwickGlasgowIpswichKetteringLeedsLeicester

LiverpoolLondonManchesterMilton KeynesNewcastleNorthamptonNorwichOxfordReadingSheffieldSouthampton

Grant Thornton offices:

Mark ByersPartnerGlobal Head of RestructuringT 020 7728 2522E [email protected]

David Dunckley PartnerHead of Mid Market RestructuringT 020 7728 2408E [email protected]

Geoff Davies PartnerHead of Corporate FinanceT 012 2322 5630 E [email protected]

Stephen Rigby PartnerHead of Performance Improvement T 020 7865 2101 E [email protected]

Mo MeraliPartnerHead of Private EquityT 020 7728 2501 E [email protected]

Jeremy ToonePartnerHead of Real Estate Advisory T 020 7865 2314 E [email protected]

grant thornton uk - restructuring outlook for 2012

Economy & Finance

respondents thinkthat

riskpercentage of respondents

large number of respondents

vast majority of respondents

uk businesses

uk economy20

uk economyperhaps

stagnating uk growth