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Grant Thornton - UK Restructuring Outlook 2013


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The Grant Thornton UK Restructuring Outlook for 2013 survey provides key insights into the sectors considered to be particularly vulnerable and into the restructuring strategies that are commonly employed. It also considers how defaults and bank forbearance levels are likely to evolve in 2013.

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Grant Thornton - UK Restructuring Outlook 2013

  1. 1. JANUARY 2013UK Restructuring Outlook 2013“Mostly stagnant, with a chance of debt sales”
  2. 2. 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 us2 Grant Thornton: UK Restructuring Outlook 2013
  3. 3. UK Restructuring Outlook 2013Summary of survey findingsWe surveyed over 230 leading UK restructuring, origination and portfolio bankers,asset based lenders, restructuring advisers and senior turnaround professionals. Here iswhat they said about the outlook for underperforming businesses in 2013.67% of respondents say that of most restructuring efforts. More far-stagnant/slow growth is the primary reaching restructuring options are oftenrisk to UK businesses...and 80% see recovery in 2013The perception of risk has shifted from 61% expect the same level of “Many think that 2013 willthe Eurozone debt crisis, which was bank forbearance in 2013...andviewed as the primary risk in 2012, to lender reputation and perceived be similar to 2012. I agreethe impact of prolonged stagnant/slow Government influence over that bank strategies will begrowth on UK businesses. In line with nationalised banks are key drivers broadly similar to last yearthis, 80% of respondents see no real Respondents expect to see similar levels and that corporate failureseconomic recovery in 2013. of forbearance in 2013. Respondents may well remain artificially also point to the long-term impact of low. However, as the UK45% expect defaults to increase in forbearance on the UK economy, where economy stagnates for2013 compared to 2012...and these lender support for ‘zombie’ companies another year, I expectare likely to be very sector focussed creates an artificial barrier to entry for that more managementThe risk of default continues to be very new, more competitive, entrants. teams will come to thehigh in 2013, with 45% of respondents realisation that they need toexpecting an increase. As we have seen Enforcement is the last resort exit for adopt alternative fundingwith Blockbusters, HMV and Jessops lenders and is only employed in the strategies and that theyrecently, retail is considered particularly minority of casesvulnerable in 2013, with more than 84% Respondents do not expect much change have some hard decisionsof respondents rating it as having lower to the strategies that are employed to make. Companies needresilience. This is closely followed by to deal with underperforming loans. to use 2013 to focus onhotels/pubs/leisure (83%), printing A significant minority expect that business improvement.”(77%), property/construction (72%) and divestments of underperforming loan Mark Byers, Partner, Global Head ofhaulage/logistics (61%). books to third parties and exits through Restructuring market sale of debt will increase in 2013.Revenue pressure is the key driver Secondary loan sales to overseas fundsof underperformance...but cost are viewed as a key area of activity, notcutting continues to be the favoured just in the UK but throughout Europe.restructuring toolWhen asked to rate the contributoryfactors that led to distress in 2012,declining revenue ranks highest, yetcost cutting remains the primary focus Grant Thornton: UK Restructuring Outlook 2013 3
  4. 4. 67% of respondents say thatstagnant/slow growth is theprimary risk to UK businesses...Last year, 72% of respondents rated the Eurozonesovereign debt crisis as the key threat to UKbusinesses. This year, the perception of risk has “Difficult times ahead with the economy continuingshifted away from the Eurozone and towards to remain flat. Austerity measures to properly kickthe risk of prolonged stagnant/slow growth. in, impacting disposable income and subsequently67% of our respondents now consider this as businesses. Eurozone collapse still not off the table....”the main threat to UK businesses, followed by Restructuring/recovery bankerthe Eurozone sovereign debt crisis (41%), UKausterity measures (40%) and access to debtfinance (40%). More positively, and in line with the December2012 Autumn Statement, the impact of UK Question: Looking at the next 12 months, how would you rate the potential impactcorporate tax is perceived to be lower than last of the following macro trends on UK businesses?year. Risks to UK businesses associated with the % of respondents rating impact as 8 to 10 out of a range of 1 to 10 (10 highest and 0 lowest impact)sterling exchange rate are also expected to be lower 80%in 2013. 70% 2013 60% 2012 “Limited recovery in terms of GDP 50% improvement but restricted to certain sectors rather than wide-spread” 40% Banker, Credit Risk 30% 20% 10% 0% “A slight improvement from 2012 UK austerity measures Access to debt finance UK Corporate tax burden Sterling exchange rate Prolonged stagnant/slow growth in the UK Eurozone sovereign debt crisis 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 banker4 Grant Thornton: UK Restructuring Outlook 2013
  5. 5. ...and 80% see no recovery in 2013 Whilst fewer respondents expect the economy toQuestion: Looking to the next 12 months, do you expect UK economic conditions 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 recovery2013 - 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 Improve significantly (2%) restricted to stronger operators, with pressures Improve somewhat (18%) on weaker competitors increasing. Similarly, in Stay the same (60%) terms of sectors, respondents expect a real mix of Deteriorate somewhat (19%) performance in 2013, with retail, hotels & leisure Deteriorate significantly (1%) 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 2013.2012 Improve significantly (0%) “2013 will be marked by muted Improve somewhat (2%) consumer confidence and tough Stay the same (28%) Deteriorate somewhat (63%) trading conditions for companies Deteriorate significantly (7%) 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 Grant Thornton: UK Restructuring Outlook 2013 5
  6. 6. 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? “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 Increase (45%) and working capital lending. We Stay the same (50%) may also see more willingness to Decline (5%) enforce by new stakeholders that have previously purchased loan portfolios or debt at a discount.” David Dunckley, Partner, Head of Mid Market Restructuring“More of the same. Consumers are being squeezed by lowpay increases and rising prices, especially utilities. Lowerdiscretionary spending impacting on leisure and retail.Property market is still sluggish.”Restructuring/recovery banker 6 Grant Thornton: UK Restructuring Outlook 2013
  7. 7. ...and these are likely to be verysector focussed As we have seen with Blockbusters,Question: Looking at the next 12 months, how would you rate the resilience of the followingsectors of the UK economy? HMV and Jessops recently, retail is considered particularly vulnerable in 2013, with more than 84% of 0% 20% 40% 60% 80% 100% respondents rating it as having lower Retail resilience. A similar level of risk is attached to hotels/pubs/leisure, rated Hotels/ Pubs/ Leisure by 83% of respondents as having lower Printing resilience. This is closely followed by printing (77%), property/construction Property/ Construction (72%) and haulage/logistics (61%). Haulage/ Logistics On a positive note, many sectors are doing comparatively well and are rated Travel/ Tourism as having a higher resilience, including Automotive energy/utility (71%), pharma/biotech/ Professional Practices medical devices (57%), agribusiness/ food/beverage (51%) and aerospace/ Shipping defence (46%). Healthcare (private) Manufacturing Financial Services Infrastructure Agribusiness/ Food/ Beverage Aerospace/ Defence Technology/ Media/ TelecomsPharma/ Biotech/ Medical Devices Energy/ Utility Higher resilience Average resilience Lower resilience Grant Thornton: UK Restructuring Outlook 2013 7
  8. 8. Pressure on revenue is the keydriver of underperformance...Contributory factors leading to distress Question: Looking at the distressed cases you worked on in the last 12 months, what were theWhen asked to rate the contributory main contributory factors leading to distress?factors for distress in 2012, the vast % of respondents rating impact as 8 to 10 out of a range of 1 to 10 (10 highest and 0 lowest impact)majority of respondents highlightdeclining revenues and rising 100%costs. These issues are commonlycompounded by poor management 80%decisions and poor financial control. 60% 40% 20% 0% Export market volatility Fraud Decline in revenues Poor financial control Inappropriate business model Rising costs Tax/TTP debt burden Poor management decisions More limited/expensive debt finance Increased competition Public sector cuts Product substitution/obsolesence External regulation Pension scheme commitments “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 Improvement8 Grant Thornton: UK Restructuring Outlook 2013
  9. 9. ...but cost cutting continues to bethe favoured restructuring tool 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% Financial restructuringEnforcement continues to be a lastresort exit Operational restructuring/ turnaroundRespondents report that financial andoperational restructurings continue to Trading administrationbe favoured over enforcement action.Administrations, pre-packs and CVAs Pre-pack administrationare seen as the last resort and areemployed as such. Exit via alternative funder The survey also highlights thescarcity of re-banking options for CVAunderperforming businesses - exits via Rollover with changes to termsalternative funders are employed in theminority of cases or not at all. With so Forbearancelittle fluidity in the market the onus ison lenders and their customers to work Appointment of CROtogether to resolve underperformanceissues. All of them The majority The minority NoneExtent of operational restructurings is Question: Looking back at the last 12 months, did your borrowers successfully implement the following?not far reaching enoughBusinesses and their lenders 0% 20% 40% 60% 80% 100%continue to favour quick solutions to Cost cutting programmesunderperformance. Respondents reportthat cost cutting programmes, better Better cash flow managementcash flow management and reductionsin staff costs are routinely implemented. Reduction in staff costMore far-reaching restructurings that Better focus on sales andinterrogate the fundamentals of the marketingbusiness, its processes and how valuecan be created are often overlooked. Divestments of non-core assets Realignment of strategy/ business model Diversification strategy Outsourcing strategy Management team restructure All of them The majority The minority None Grant Thornton: UK Restructuring Outlook 2013 9
  10. 10. 61% expect the same level ofbank forbearance in 2013...Banks are expected to use forbearance at Question: In 2013, do you expect bank forbearance strategies to be used?similar levels to last year. This is consistentwith respondents’ more stable outlook for UKcorporate failure levels and their expectation thatthe UK economy will not deteriorate further. Respondents also point to the long-termimpact of forbearance on the UK economy,where lender support for ‘zombie’ companies More than in 2012 (20%)creates an artificial barrier to entry for new, more Same level as 2012 (61%)competitive, entrants. Less then in 2012 (19%) 80% 70% 2013 61% 60% 57% 2012 50% “Ordinarily, I would have expected 40% less forbearance in 2013, on the 29% basis that lenders may well be 30% 20% 19% less likely to ‘wait and see’ and 20% 14% because the market for impaired 10% assets and debt is likely to be more 0% fluid. However, the global liquidity More than in 2012 Same level as 2012 Less than in 2012 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, Restructuring10 Grant Thornton: UK Restructuring Outlook 2013
  11. 11. ...and lender reputation andgovernment influence over nationalisedbanks are considered key drivers When asked what will impact on bankQuestion: Looking at the next 12 months, how do you rate the impact of thefollowing on bank forbearance? forbearance levels in 2013, respondents point to many factors. The perceived Government % of respondents rating impact as 7 to 10 out of a range of 1 to 10 (10 highest and 0 lowest impact) influence over nationalised banks, the review80% of the sale of interest rate products and public opinion are considered key drivers. It is of note70% that only 30% point to the hope of future value60% enhancement as a driver for forbearance.50%40%30%20%10% 0% Government influence over nationalised banks interest rate products Public opinion Hope for future value Review of the sale of Low interest rates Basel II & III Disproportionate cost of recovery/enforcement enhancement“The key difference for me is the impact of Basel III,as banks wise up to the cost of capital and realise theunderlying cost / impact of holding impaired assets on theirbalance sheet. This will drive bank strategies in 2013.”Origination/portfolio banker Grant Thornton: UK Restructuring Outlook 2013 11
  12. 12. Enforcement is the last resortexit for lendersRespondents do not expect much change Question: Looking at your underperforming loans, which strategies will you employto the strategies that are employed to deal in 2013?with underperforming loans. A significant 0% 20% 40% 60% 80% 100%minority, however, expect that divestments ofunderperforming loan books to third parties and Divestment of underperforming loan book/or partexits through market sale of debt will increase, thereof to third parties35% and 32% respectively. A number of respondents point to more Exit through market sale of debtsecondary loan sales to overseas funds and expectthis to be a key area of activity in 2013, not just in Instigate operationalthe UK but throughout Europe. improvements Enforcement Debt for equity swap Continue to support More than 2012 Same as 2012 Less than 2012 “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 adviser12 Grant Thornton: UK Restructuring Outlook 2013
  13. 13. “I expect corporate failures to increase because of the lack ofalternative debt funding. In some cases banks will have bornewith the situation for a number of years. This cannot continueindefinitely.”Restructuring/recovery bankerQuestion: Looking at the next 12 months, do you expect the number of corporate failures to... “I’d say that enforcement action will still be the last resort in 2013, lenders are much more Increase (46%) likely to favour other Stay the same (50%) restructuring strategies. Decline (4%) In some cases I actually see them taking the bull by the horns and injecting cash to support turnarounds.” Adrian Richards, Partner,60% Restructuring 51% 50% 201350% 46% 43% 201240%30%20%10% 6% 4% 0% Increase Stay the same Decline Grant Thornton: UK Restructuring Outlook 2013 13
  14. 14. Question: Looking at the next 12 months, do you expect the number of pre-packadministrations to... “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 Increase (35%) the economy picks up and Stay the same (56%) interest rates rise. Then, SMEs Decline (9%) and the smaller real estate companies and retailers will be in the firing line.” Origination/portfolio banker60% 56% 52% 201350% 45% 201240% 35%30%20% 9%10% 3% 0% Increase Stay the same Decline14 Grant Thornton: UK Restructuring Outlook 2013
  15. 15. About the RestructuringOutlook for 2013This is a survey of UK restructuring/recoverybankers, asset based lenders and restructuringadvisers including senior turnaround professionals.It assesses the environment for underperformingbusinesses in the UK in 2013, provides insightsinto the restructuring strategies employed inthe market and compares sector vulnerability.Responses were collected online from 12December 2012 to 2 January 2013. In total 233respondents participated, breaking down into32% restructuring and recovery bankers, 26%origination/portfolio/credit risk bankers, 12%interim directors, 11% lawyers, 5% PE/specialsituations and mezzanine investors, 4% asset basedlenders and 11% restructuring advisers and othermarket participants. Respondents work with UK businesses of allsizes. In terms of debt this breaks down into, 8%work with businesses owing +£100 million, 11%with those owing £50-100 million, 14% with thoseowing £25-50 million, 34% with those owing£5-25 million and 33% with those owing £0-5 million. Grant Thornton: UK Restructuring Outlook 2013 15
  16. 16. Contact usLondon Restructuring London Mid Market Selected EMEAContacts Contacts Restructuring ContactsMark Byers David Dunckley FrancePartner, Global Head of Restructuring Partner, Head of Mid Market Restructuring Jean-Pascal BeauchampT +44 (0)20 7728 2522 T +44 (0)20 7728 2408 PartnerE E T +33 (0)1 56210569 E O’Callaghan Ian CorfieldPartner, UK Head of Restructuring Partner GermanyT +44 (0)20 7865 2887 T +44 (0)20 7865 2889 Heike Wieland-BloeseE E Partner T +49 (0)211 9524 512Sarah Bell E heike.wielandbloese@wkgt.comPartnerT +44 (0)20 7728 2409 Regional UK Mid IrelandE Paul McCann Market Contacts PartnerGrant McRobert T +353 (0)1 6805604Partner Birmingham E +44 (0)20 7865 2119 David BennettE Partner Netherlands T +44 (0)121 232 5217 Matthieu TakAdrian Richards E PartnerPartner T +31 (0)20547 5757T +44 (0)20 7728 2001 Bristol E matthieu.tak@gt.nlE Nigel Morrison Partner PortugalDaniel Smith T +44 (0)117 305 7811 Maria MendesPartner E PartnerT +44 (0)20 7728 2139 T +351 (0)21 413 4632E Cambridge E Ian Carr Partner Russia T +44 (0)1223 225625 Andrey SorochanSpecialist London E PartnerContacts Cardiff T +7 (0)495 258 9990 E Alistair WardellStephen Baker Partner South AfricaPartner, Corporate Finance T +44 (0)29 2034 7520 Gillian SaundersT +44 (0)20 7728 3100 E PartnerE T +27 (0)11 322 4500 Glasgow/Edinburgh E Hiddleston Rob CavenPartner, Head of Restructuring Tax Partner SpainT +44 (0)20 7728 2618 T +44 (0)141 223 0629 Ramon GalceranE E Partner T +34 (0)93 206 3900Darren Mason Leeds/Newcastle E, Head of Pensions Advisory Joe McLeanT +44 (0)20 7728 2433 Partner UAEE T +44 (0)113 200 1506 Hisham Farouk E PartnerMo Merali T +971 (0)4 268 8070Partner, Head of Private Equity Manchester E hisham.farouk@gtuae.netT +44 (0)20 7728 2501 Matt DunhamE Partner T +44 (0)161 953 6495Stephen Rigby E, Head of Performance ImprovementT +44 (0)20 7865 2101 David RileyE Partner T +44 (0)7775 826 394Jeremy Toone E, Head of Real Estate AdvisoryT +44 (0)20 7865 2314 ReadingE Daniel Taylor Partner T +44 (0)118 983 9601 E© 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 aredelivered 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 beaccepted by us for loss occasioned to any person acting or refraining from acting as a result of any material in this V22450