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The Insolvency Market

The press has recently featured commentary from various financial, business and political figures marking ten years since the collapse of Lehman Brothers, which is understandably seen as a watershed of the Financial Crisis. 

This was a time characterised by a slump in asset values and transaction rates, fuelled by an absence of finance and liquidity from the market. It resulted in government intervention on a huge scale, often globally orchestrated. As in all recessions those able and willing to adopt strategies based on recognising the cyclical nature of markets were in a position to capitalise on opportunities that arose.  

I remember working for a national firm specialising in the insolvency market at this time, and in the years leading up to it. Although we would not claim to have foreseen the depth of the crisis the signs of an over-heated market having reached its peak were around. Northern Rock, news of property investment transaction yields less than the prevailing base interest rate, and the slowing residential market in 2007, coupled with the preceding fifteen years of debt fuelled growth, are examples of signs something different was approaching.  

However the ensuing recessionary years did not take the expected form of economic downturns that had gone before, not least from the perspective of insolvency professionals. Many businesses which might have otherwise succumbed were kept going by the stimulus measures adopted by governments, such as an unprecedented period of low interest rates. Lender’s distressed loan recovery strategies became focused upon portfolio realisation. Traditional receivership led recovery was largely usurped, certainly by mid-2012, by the packaged loan book sale, often to private equity. Receivership and insolvency teams in surveying firms and other professions reduced in size far quicker than the scale of the problem suggested they would.

The Financial Crisis gave way to post recession talk in insolvency circles of the so called ‘zombie companies’, those it was anticipated might fall into some form of insolvency process by the rising interest rates that were anticipated as the economy improved – and which we have not yet experienced.

The market today is still one of very low base rates however for many businesses seeking new or additional borrowings, offers will reflect higher risk premiums and greater levels of stress testing.

The sectors of the economy that are currently experiencing distress are national retailers with business models weighted in favour of traditional property based platforms, often with large lot sizes, and the casual dining sector.

For many retailers the combination of on-line completion, large rent rolls on illiquid leasehold portfolios, increasing costs and business rates has been a perfect storm. The illiquid nature of the property portfolios has, in part, led to the Company Voluntary Arrangement (CVA) becoming a more popular way of dealing with corporate distress, to the extent they are now often referred to as Landlord CVAs.

CVAs are a way of avoiding a formal insolvency process which carry greater risk a business does not re-emerge intact. However in these cases there are still losers, and the process is heavily scrutinised by some landlord creditors of the companies proposing the CVAs, and also by competitors with business models better balanced in today’s economy.

The casual dining sector, on the other hand, has experienced a more recent and relatively short period of highly leveraged and rapid expansion, often with greater emphasis on growth and brand exposure than to trading pitch and product specifics. Up until two years ago this was seen as a strongly growing market, and its U-turn has quickly followed. Property has of course been a component part of the casual dining expansion process.

In the case of both sectors the ensuing CVAs have left landlords in the less attractive locations, who did not vote in favour of the company’s proposals left with empty properties, an argument over dilapidations, and feeling penalised by the voting structure in these arrangements.

Aside from these sectors we have seen a number of charity corporate failures, often led by falling revenues, which can be consumer led resulting from economic concerns, or from reallocation or expiry of grant funding, some of which maybe EU originated. With falling revenues significant fixed costs such as leasehold property portfolios become onerous. 

Many of the recent commentators and speakers have sounded cautionary and alarming notes, often in terms designed to grab the headlines. However there are macro-economic and sector specific concerns facing consumers, businesses and decision makers: The Bank of England has for some time been issuing warnings regarding consumer borrowing and the need to raise interest rates beyond the current low levels. Recent press reports have highlighted board members of national house builders selling significant shareholdings, which follows extensively reported weakening trends in the residential market. This also comes at a time of scrutiny into business practice in the construction sector exposed by the collapse of Carillion.  There is continuing uncertainty surrounding the Brexit deal, and a weak coalition government fuels the possibility of a far left government. Interestingly, at the time of going to press, the budget has reintroduced HMRC as a preferential creditor in insolvent circumstances; a position it gave up in 2002.

Whereas before 2008 it was thought recessions could be plotted with reasonable certainty, the Financial Crisis, the period of growth that preceded it and the impact of technology, changed the landscape fundamentally. In unprecedented times, with little from the past left to guide opinion on exactly where we are in the cycle, and what form it will take, insolvency professionals expressed analogies such as boxing up and shelving their crystal balls a long time ago. The question of course remains; when do you get them down and dust them off? 

Brown&Co’s expertise in commercial, residential, agricultural and machinery markets is ideally placed to assist Secured Lenders, Insolvency Practitioners, Receivers and their Professional Advisors in distressed circumstances across sectors and disciplines.

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