Grant Thornton UK - Restructuring Outlook for 2012


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The results of Grant Thornton's 'Restructuring Outlook for 2012' survey provide insights into the factors that lead to corporate underperformance, the restructuring strategies that are commonly employed and how these strategies are likely to evolve in 2012. The briefing also provides an overview of the sectors considered particularly vulnerable in the current climate.

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Grant Thornton UK - Restructuring Outlook for 2012

  1. 1. Restructuring Outlook for 2012March 2012
  2. 2. Key themes for 2012The restructuring landscape in 2012 is likely tobe characterised by low interest rates, a lack ofliquidity and low asset prices as well as banks’continuing efforts to minimise losses.In line with this, respondents to Grant Thornton’s‘Restructuring Outlook for 2012’ survey expect thatunderperforming businesses in the UK, their fundersand other stakeholders will continue to collaborate,wherever possible, to save businesses throughfinancial and operational restructurings. However, respondents also highlighted thatsome business models will need a radical overhaulto survive in a low growth economy and that arestriction in credit availability, which many expectto worsen in 2012, may make this particularly Contentsdifficult. Also of concern to respondents is‘restructuring fatigue’ of management teams and 2. Key themes for 2012stakeholders, especially in relation to companies thathave been through numerous restructurings already. 3. Summary of survey findings Predictably, a large number of respondents 4. Macro-economic threats and the outlookcaveated their responses in case of a disorderly for the UK economyGreek default or a breakup of the Eurozone. Onerespondent said memorably: 6. Resilience of UK business in 2012 8. Restructuring strategies employed “If the Euro collapses then all bets 12. Refinancings, forbearance and are off” administration levels Restructuring/recovery banker 15. About ‘Restructuring Outlook for 2012’2 The Restructuring Outlook for 2012
  3. 3. Summary of survey findingsPerhaps unsurprisingly, 72% of respondents think that the Eurozonesovereign debt crisis poses the greatest macro-economic threat to theUK economy in 2012, followed by stagnating UK growth and theGovernment’s austerity measures.The UK economy Trading administrations/pre-packs63% of respondents expect a deterioration of In line with the subdued outlook for the UKeconomic conditions in 2012. More positively, economy, 51% of respondents expect tradingonly 7% expect a significant deterioration. administrations to increase in 2012. This is, of course, from a relatively low level. The sameDefaults and sectors most at risk percentage of respondents expect pre-pack75% of respondents expect default rates to go up administrations to 2012, with retail, hotels/leisure, print, property/construction, haulage/logistics and travel/tourismrated as particularly vulnerable.Factors leading to distressWhen asked to rate the contributory factors fordistress in 2011, the vast majority of respondents “There is now a greater realisation by funders thathighlighted declining revenues and rising costs. ‘extend and pretend’ strategies which are reliant onThese issues were commonly compounded by poor low interest rates and low inflation come with a ‘sell-management decisions and poor financial control. by-date’ and that fixes to the capital structure, and in many cases, far reaching operational changes areRestructuring solutionsWhen asked which restructuring strategies necessary to create sustainable value.” Mark Byers, Partner, Global Head of Restructuringwere successfully implemented in 2011, mosthighlighted better cash flow management,cost cutting programmes and staff reductions.Respondents said that whilst cash control willstill be key in 2012, the focus will shift towardsoperational restructurings.Availability of refinancing fundsThe majority, 60%, of respondents expect theavailability of funds for refinancing in 2012 to bebroadly the same as in the previous year. Of noteis that 56% of respondents expect an increase inthe availability of distressed asset funds whilst justunder 50% expect a decrease in leveraged finance. The Restructuring Outlook for 2012 3
  4. 4. Macro-economic threatsand the outlook for theUK economyMacro-economic threats to the UK economyPerhaps unsurprisingly, 72% of respondents thinkthat the Eurozone sovereign debt crisis posesthe greatest macro-economic threat to the UKeconomy in 2012, followed by stagnating UKgrowth and the Government’s austerity measures.Fig 1: Looking to the next 12 months, how do you rate the impactof the following macro trends? % of respondents rating impact as highest (8 to 10 out of range 1 to 10)80 72%70 59%60 49%50 45% “Addressing the uncertainty in the Eurozone has to form40 36% a fundamental part of any longer term solution within30 the UK economy”20 15% 15% Restructuring/recovery banker10 0 The weighting given to the Eurozone sovereign Prolonged stagnant/slow growth in the UK UK Corporate tax burden UK austerity measures Eurozone sovereign debt crisis More limited debt finance UK double-dip Currency issues 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.4 The Restructuring Outlook for 2012
  5. 5. “I’ve been predicting more corporate failures for thelast two years and it’s not happened. So althougheveryone is saying 2012 will be even harder I’m actuallyexpecting a similar year to the last two”Restructuring/recovery banker Outlook for the UK economy in 2012“I expect economic conditions to be challenging In line with UK economic projections, 63% ofin 2012. This combined with lenders seeking to respondents expect a deterioration of economic conditions in 2012. More positively, only 7% expectdeleverage their own balance sheets and having limited a significant deterioration. 28% expect economicappetite for new money will mean many restructurings conditions to stay the same, whilst 2% expect themwill be structured to deliver a short term exit” to improve somewhat. No one surveyed expects theRestructuring/recovery banker 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 2% 7% 28% 63% Deteriorate significantly Deteriorate somewhat Stay the same Improve somewhat Improve significantly* (nobody chose this option) The Restructuring Outlook for 2012 5
  6. 6. Resilience of UK businessin 2012Default levelsThe vast majority of respondents, 75%, expect default levels to increase in 2012, asconditions for many UK businesses deteriorate, with public sector cuts continuing tofilter through and private sector growth remaining sluggish.Fig 3: Looking at the next 12 months, how do you expect default levels to develop? 1% 24% Increase Stay the same Decline 75% “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 Finance6 The Restructuring Outlook for 2012
  7. 7. Fig 4: Looking at the next 12 months, how would you rate the resilience of the following sectors ofthe UK economy? Higher resiliance Average resiliance Lower resiliance Retail Hotels/ Pubs/ Leisure Printing Property/ Construction Haulage/ Logistics Travel/ Tourism Automotive Financial Services Healthcare (private)Professional Practices Manufacturing InfrastructureAgribusiness/ Food/ Beverage Aerospace/ Defence Technology/ Media / Telecoms Pharma/ Biotech/ Medical Devices Energy/ Utility 0 20 40 60 80 100Sectors most at risk in 2012 Generally speaking, UK companiesUnsurprisingly, sectors vulnerable to in global markets can look to harnesslow consumer confidence and lower new export markets, source lower costcredit availability, are considered to production and look to outsourcinghave the lowest resilience in 2012. More to mitigate against the risks of a UKthan 90% of respondents expect Retail and European downturn, whilst thoseand Hotels/Leisure and Pubs to be reliant on the domestic and Europeanparticularly vulnerable. Print, Property/ market will continue to find tradingConstruction, Haulage/Logistics and conditions difficult in 2012.Travel/Tourism and are the next mostvulnerable sectors. Marginally morerespondents expect the Automotivesector to have lower than averageresilience, so this is another sector towatch in 2012. Respondents rated only two sectors,Energy/Utility (71% of respondents)and Pharma/Biotech/Medical devices(53% of respondents) as more resilientthan the average. The Restructuring Outlook for 2012 7
  8. 8. Restructuring strategiesemployedContributory factors leading tounderperformance of UK businessesWhen asked to rate the contributory factors fordistress in 2011, the vast majority of respondentshighlighted declining revenues and rising costs.These issues were commonly compounded by poormanagement decisions and poor financial control.Fig 5: Looking at the distressed cases you worked on in the last 12 months, what were the main contributory factors leading to distress?100 80 60 40 20 0 Decline in revenues Poor management decisions Poor financial control Rising costs Inappropriate business model More limited/ expensive debt finance Tax/TTP debt burden Increased competition Public sector cuts Fraud Product substitution/ obsolesence Export market volatility External Regulation8 The Restructuring Outlook for 2012
  9. 9. Financial and operational Fig 6: In the last 12 months, what type of restructuring strategies have been employed in the cases yourestructurings favoured in 2011 worked on?Respondents reported that the majority All of them The majority The minority Noneof distressed businesses they workedwith in 2011 carried out financial Financial restructuringand operational restructures. Whilst Operational restructuring /Turnaroundoperational restructurings have taken Administrationplace in many cases, these were mostly Pre-pack administrationaround cost cutting and staff reductions.Banks agreed to rollover debt with CVAchanges to terms in the majority of Exit via alternative fundercases. Administrations and pre-pack Rollover with changes to termsadministrations were seen as the last Forebearanceresort and were employed as such. CVAs 0 20 40 60 80 100and exits via alternative lenders wereemployed in a minority of cases. “With downside risks for the global economy depressing company valuations, banks will continue to favour consensual restructuring“Lack of liquidity in the market will dissuade lenders solutions over forced disposals orfrom exiting by administration where avoidable.” insolvency. However, a significantRestructuring/recovery banker 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 The Restructuring Outlook for 2012 9
  10. 10. Restructuring strategies to deal Fig 7: Looking back at the last 12 months, did your borrowers successfully implement the following?with underperformance All of them The majority The minority NoneWhen asked which restructuringstrategies were successfully Better cash flow managementimplemented in 2011, most highlight Cost cutting programmesbetter cash flow management, Reduction in staff costcost cutting programmes and staff Realignment of strategy/ business modelreductions. Respondents said thatwhilst cash control will still be key in Better focus on sales and marketing2012, the attention is shifting towards a Management team restructuremore focused assessment of operational Divestments of non-core assetsdeficiencies, their impact on the Diversification strategybottom line and the capital expenditure Outsourcing strategynecessary to deal with them. 0 20 40 60 80 100 120 Interestingly, whilst 80%of respondents point to poormanagement decisions as a keycontributory factor leading todistress in 2011, management teamrestructures were only implementedin the minority of cases. Workingwith management teams of distressed “Over the last few years, especiallycompanies to drive behavioural andmore structural changes will need to for businesses that were not inbe a key area of focus for 2012. actual payment default, the lenders’ restructuring approach was often to ‘extend and pretend’ and fixes to the “More operational restructuring required as capital structure were often avoided. follow up to earlier financial restructurings that Many of these companies will need to haven’t worked. More pain to be taken as poor substantially increase their trading activity businesses face up to years of excess that they to avoid future covenant breaches. In a can no longer carry.” stagnating economy, this may well require Restructuring/recovery banker a fundamental rethink of their business model to drive profitability and growth” Stephen Rigby, Partner, Head of Performance Improvement10 The Restructuring Outlook for 2012
  11. 11. Sectors under threat Retail “Over the last few years many retailers have failed to adapt their business model to the changes in the way that consumers shop. Hotels Where operational restructuring did occur, it “In 2012 hotel performance will was mostly reactive and focused on aligning follow a similar trend to that the cost base to perceived recessionary in 2011, with London hotels trading levels, in the expectation that the outperforming regional hotels market would soon return to 2007 levels. For and with budget, limited service many retailers, this may prove a fatal error and luxury hotels outperforming as the current and future retail environment the 4-star sector. The 4-star requires a significantly reduced physical hotel business model will remain footprint. So, the right-sizing of retailer’s under significant pressure, with store footprint will need to be a key area of limited service hotels successfully focus in 2012, alongside continuous efforts to targeting corporate business. This optimise their supply chain, merchandising will be compounded by the fact and retail operations.” that many hotels in this segment Grant McRobert, Restructuring Partner, Retail 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 Real Estate “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 The Restructuring Outlook for 2012 11
  12. 12. Refinancings, forbearance andadministration levelsAvailability of funds to refinance existing bank debtThe majority, 60%, of respondents expect the availability of funds forrefinancing in 2012 to be broadly the same as in the previous year. Ofnote is that 56% of respondents expect an increase in the availabilityof distressed asset funds whilst just under 50% expect a decrease inleveraged finance. The expected restriction of leveraged finance availability in themarket will be of significant concern, as will be the impact of the ‘wall ofrefinancing’ on debt markets in 2012 and beyond. At present, it is unclearhow 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 lessresilient will be most vulnerable to a possible credit restriction in 2012.Fig 8: In terms of restructuring/refinancing existing bank debt, how much would you rate theavailability of the following in 2012? Less availability than in 2011 Same as 2011 More availability than in 2011 Leveraged finance Bi-lateral lending “Those looking to refinanceClub deals/syndicated in 2012, whether by choice or necessity, are facing a changed Shareholders environment. Leveraged finance is not as readily available and PE finance for some, alternative sources of finance, such as asset based lendingDebt for equity swaps with its lower capital adequacy requirement, may well become the ABL funding solution of choice” David Riley, Partner, AdvisoryDistressed asset funds 0 20 40 60 80 10012 The Restructuring Outlook for 2012
  13. 13. “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 whichUse of forbearance in 2012 degree forbearance has masked anThe majority of respondents, 57%, expect the use of forbearance to underlying risk to banks’ capitalremain at the same level as in 2011. A sizable number of respondents, levels will only become clearer29%, expect banks to make more use of forbearance, whilst 15% if these macro-economic threatsexpect a decline. play out.”Fig 9: In 2012, do you expect bank forbearance Mark Byers, Partner, Global Head of Restructuringstrategies to be used More than in 2011 Same level as 2011 “A large part of forbearance risk Less than in 2011 in the UK will be attached to residential and commercial real estate, saying this, as the use of 15% forbearance comes under greater 29% 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 57% The Restructuring Outlook for 2012 13
  14. 14. Levels of pre-pack and tradingadministrationsThe lack of liquidity in the marketwill continue to make tradingadministrations the least attractiveoption for exit. However, in linewith the subdued outlook for theUK economy, 51% of respondentsexpect trading administrations toincrease in 2012. This is, of course,from a relatively low level. The samepercentage of respondents expect pre-pack administrations to increase.Fig 10: Looking at the next 12 months, do youexpect the number of trading administrations to Stay the same Increase Decline 5% 44% 51%Fig 11: Looking at the next 12 months, do youexpect the number of pre-pack administrations to Stay the same Increase Decline 3% 46% 51%14 The Restructuring Outlook for 2012
  15. 15. About ‘RestructuringOutlook for 2012’This is a survey of UK restructuring/recoverybankers, asset based lenders and restructuringadvisers including senior turnaround professionals.It rates the prospects for UK businesses in 2012and provides insights into the restructuringstrategies employed in the market and thekey sectors expected to be vulnerable in 2012.Responses were collected online from 9 Jan2012 to 20 Jan 2012. In total 183 respondentsparticipated, breaking down into 48 %restructuring and recovery bankers, 27% liveside bankers, 7% asset based lenders and 18%turnaround executives and other restructuringadvisers. Respondents work with UK businesses ofall 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. The Restructuring Outlook for 2012 15
  16. 16. Contact usMark Byers David Dunckley Geoff DaviesPartner Partner PartnerGlobal Head of Restructuring Head of Mid Market Restructuring Head of Corporate FinanceT 020 7728 2522 T 020 7728 2408 T 012 2322 5630E E E Rigby Mo Merali Jeremy ToonePartner Partner PartnerHead of Performance Improvement Head of Private Equity Head of Real Estate AdvisoryT 020 7865 2101 T 020 7728 2501 T 020 7865 2314E E E Thornton offices:Belfast LiverpoolBirmingham LondonBristol ManchesterCambridge Milton KeynesCardiff NewcastleEdinburgh NorthamptonGatwick NorwichGlasgow OxfordIpswich ReadingKettering SheffieldLeeds SouthamptonLeicester© 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 withinGrant Thornton International Ltd (‘Grant Thornton International’).Grant Thornton International and the member firms are nota worldwide partnership. Services are delivered by the memberfirms independently.This publication has been prepared only as a guide.No responsibility can be accepted by us for loss occasionedto any person acting or refraining from acting as a result ofany material in this