Exclusvie Q&A On Bankruptcy & Restructuring With Colin Blessley

Which industries offer the best restructuring opportunities for investors and advisors?

The UK economy over recent months has shown that it is one of the best-performing in the G7 coming out of the recession. However, this encouraging performance masks some underlying issues that need to be remedied for long-term economic sustainability.

In particular, manufacturing continues to represent a dwindling proportion of GDP due to a variety of factors: a worrying lack of competitiveness resulting from deteriorating productivity indices; a failure to capitalise on some hard-earned unique qualities, such as specialism in niche sectors, as a platform to increase export sales; despite a loss of productivity, UK production costs are becoming more competitive when compared to countries such as China; and access to affordable lending, particularly in the middle-market corporate sector.

The UK retail sector is overcrowded in a number of areas, notably women’s fashion where a number of businesses including some well-known brands have disclosed disappointing results recently. The concerns about sourcing of product from sweatshops in developing countries have generated additional pressure on brands. The fading appeal of High Street shopping adds further complications.

What are the main challenges facing businesses in the current economic climate?

The prolonged recessionary period has meant that many businesses have tightened their belts to such an extent that, now a period of recovery appears to be sustainable, their ability to ride on the coat-tails of the improved prospects for corporates has been severely impacted.

The lack of investment in updating plant and in R&D, the paring back of marketing spend and an ageing workforce, amongst other austerity measures, has meant that a number of companies now face enormous challenges to make up for lost time.

As the measures to reverse the trends resulting from this lean period will take time to bear fruit, many of those businesses that have managed to live through the recession will be facing severe demands on their cash flows to fund the investment required to get back up to a competitive footing.

What are the main challenges currently facing lenders?

In the period building up to the recession, many of the issues that businesses currently face is how to service debt that was issued in the then “covenant light” environment.

However, this legacy is also a major issue for lenders. How can you, as a lender, enforce collection of what is evidently a defaulted loan when your credit agreement does not give you the necessary levers to enable you to foreclose when the triggers should have become apparent?

This anomalous situation is contributing to the continued existence of “zombies”.
In terms of new lending to businesses that, justifiably, require funding for their expansion plans, the pendulum reaction of mainly financial institutions to impose harsher underwriting criteria would seem to be counter-productive. Insistence on personal guarantees and asset-backing where none was exacted in previous times is not helping to promote entrepreneurial endeavours.

What makes the situation even more ironic is that, according to all the available statistics, there are more funds available in the system to be lent to SMEs, they are just not getting committed.
 
To what extent are zombie companies holding back recovery, and how can this be rectified?

Businesses that cannot expand or grow are a drag on economic growth. In general, they tend to be inefficient, have low productivity, do not generate new jobs, distort competition in a free market and do not innovate. It could be argued that, by merely allowing them to survive, this is causing less harm to the economy than would be the case if they were allowed to fail. However, a proportion of these businesses will have sustainable underlying industrial or commercial propositions and, if properly restructured, could perform a lot better than they are currently managing to deliver on tacit life-support. It requires lenders to undertake a serious review of the businesses’ prospects and to provide suitably tailored support to enable a turnaround of their fortunes.

What measures can lenders take to protect themselves from doubtful debt?

We are seeing a pendulum effect in the behaviour of lenders in the current environment. Prior to the financial crisis, lending was covenant-light and far more aggressive than we are seeing at present. Little due diligence or pre-lending review was carried out and, when borrowers started to underperform, lenders found themselves with few levers to mitigate their exposure.

Underwriting criteria are currently being applied with greater rigour in relation to new lending, but this is not the only answer to reducing the level of doubtful debt going forward. More focused due diligence on potential borrowers, getting to know the client better and having a better grasp of the underlying dynamics of the business, together with regular provision of reliable management information will help lenders  reduce their exposure and react in a more timely and effective manner if  the key indicators start to turn negative.

In an ideal world what would you like to see implemented or changed?

Much has been made of the entry of the “challenger banks” into the UK market. In addition, there are many other types of funding platforms taking an increasing share of business lending. However, there does not appear to be a major behavioural change in lending practice.

It would be a major contribution to economic growth if lenders would focus more on cash flow-based lending as opposed to continuing to require significant asset-backing. Many of the new entrants in the entrepreneurial economy are asset-poor, have plausible business models that require development funding but have difficulties accessing new equity.

A recognition of the concept of risk-sharing by lenders, as opposed to continuing to require personal guarantees from
owner-managers would be a welcome revival of this principle.  

Colin Blessley leads the turnaround and performance improvement practice at Menzies. He has more than 40 years’ experience in Europe and Latin America, advising clients on a wide variety of strategic issues including performance improvement and turnaround, leading restructuring assignments involving debt exceeding £30billion.

Recently, he was Finance & Commercial Director of London 2012 Ceremonies, the company which delivered the opening and closing ceremonies of the 2012 Olympic and Paralympic Games and was a Non-Executive Director of USP Hospitales, Spain’s leading private healthcare provider. He led FTI Corporate Finance Spain, which in its first 2 years, advised on the restructuring of corporate debt exceeding €8billion.

Prior to this Colin was an adviser to the UK Financial Services Authority. Also, for 20 years he directed PwC’s Corporate Finance practice in Spain and co-led PwC’s Latin American restructuring activities.

Colin can be contacted on 020 7465 1937 or by email at cblessley@menzies.co.uk