Annual Review / Preview Event 2023

On 12 January TMA UK welcome over 120 restructuring and turnaround professionals to the Annual Turnaround Review / 2023 Preview kindly sponsored and hosted by Howden.

Expertly compered by TMA UK director Andrew Pepper, the panel consisted of highly regarded experts sharing their thoughts on turnaround in 2022 and looking ahead to 2023, including:

• Elaine Nolan – Restructuring Partner with Kirkland & Ellis International LLP
• Jonathan Hughes – Regional Sales Director, Leumi ABL
• Freya Macken – Investment Manager, AURELIUS Investment Advisory Limited
• Hamish Mackenzie – Partner and EMEA Restructuring and Deals Lead, PwC
   

What did we learn in 2022?

Our panel discussed the challenges faced in 2022, unanimously agreeing that 2022 was a particularly challenging year as a result of a number of factors - currency fluctuations, the energy crisis, rising inflation, and political instability, to name just a few.

Hamish saw inflation as an ongoing challenge which was already increasing as a result of the pandemic, even before taking in to account any other extreme factors.  Far from being transitory as the UK Government had hoped, inflation subsequently became turbo charged as a result of these wider UK and global events, such as the now ill-fated Truss mini budget, the war in Ukraine, China’s covid lockdown policy and ongoing strike action. This resulted in syndicated debt markets and M&A activity grinding to a halt towards the end of 2022 with debt maturity and refinancing a significant challenge.

Elaine saw energy, inflation and currency issues leading to considerable distress, with retailers particularly impacted. Their position might yet deteriorate further still in 2023 where they face a combination of fixed term financing, fixed price energy tariffs and currency hedging products all expiring.

Based on his experience at the coal face of UK businesses, Jonathan felt that the effect of Brexit had been seriously underestimated with exports significantly reduced (some estimating as far as 25%). Businesses continue to re-adjust to a post-Brexit landscape and, like Elaine, Jonathan fears we have yet to see some of the worse effects with increased energy costs only recently starting to hit home.

Freya highlighted the disastrous mini budget as causing significant uncertainty and resulting in decreased investment across the board, reminding us all that 2022 was potentially more tumultuous than the lockdowns as a result of Covid.

Biggest thing to happen or not happen in 2022?

Energy was an ongoing and recurring theme, with Hamish of the view that increased energy costs were the largest factor to influence the UK economy in 2022. This brought with it an increased emphasis on strong working capital positions where previously companies may have concentrated on achieving other financial targets, high turnover or EBITDA for instance. He provided the example of a current client which manufactured fertilizer which has an increased energy bill of €15m a month, and is slowly diminishing its €150m of cash reserves.

Elaine highlighted the Commercial Rent (Coronavirus) Act 2022 which came into force in March 2022 to create the Commercial Rent Arrears Arbitration scheme for rent arrears. The tsunami of landlord claims and lease forfeiture did not eventually materialise, and landlords were prepared to negotiate new commercial terms rather than resorting to the scheme.

Both Jonathan and Freya had expected 2022 to be worse with increased energy and living costs, cash flow difficulties, and Government Covid support packages and forbearance coming to an end. As a result Freya had expected to see an increase in Accelerated M&A and higher deal volumes more generally but this was not the case.

What is your nugget of information for guests?

Hamish foresees a difficult debt restructuring market in 2023 with many businesses broken, with poor capital positions and balance sheets. As a result, many businesses will require a combination of debt and operational restructuring in order to survive. He provided the recent example of Travelex which conducted a combined debt and operational restructuring with the main aim of significantly reducing costs, which in turn has returned them to profitability.

Jonathan and Freya also emphasised the importance of a strong cashflow and low operating costs. Jonathan highlighted in particular the dramatic increase of wages as a result of staff and skill shortages, which has the effect of increasing operating costs. He also highlighted the interplay between facilities provided under the Coronavirus Business Interruption Loan Scheme (CBILS), the supporting regulations, and challenges this creates for refinancing. This has opened the door for alternative lenders and investment where high street banks are not willing to lend.

Freya confirmed that the majority of Aurelius’ acquisitions involve operational turnarounds (with over 100 specialist members of staff) to ensure the businesses are individually profitable and can trade without ongoing support and investment. 

Elaine encouraged our guests to look in particular at energy price tariffs and agreements in the context of turnaround. Where you might assume there is little scope for renegotiating energy tariffs, Elaine’s team has had great success negotiating improved terms on behalf of retailers by writing aggressively to energy companies and regulators. She also encouraged the industry to make better use of restructuring plans for the mid-market in 2023, following recent successful examples.

Risk Review of 2023 – what are the risks and opportunities for 2023?

The panel agreed that a high level of liquidity would drive opportunities and deal volumes amongst alternative lenders and distressed investors, including credit funds and private equity.

Hamish foresees a difficult landscape for businesses with broken finances, particularly those with large syndicated debt. This is likely to complicate discussions between shareholders and different ranks of creditor and lead to harder restructuring processes and a rise in debt for equity swaps. This in turn opens the door for private equity investment alongside turnaround solutions.

Elaine anticipates that the mid-market might struggle for capital where they experience greater creditor squeeze. Funds are looking to invest aggressively in the mid-market, whilst at the same time many clearing banks appear to be divesting themselves of these investments.

There was some disagreement amongst the panel as to whether this liquidity and activity would in turn drive prices. Andrew highlighted an increasing number of new participants in the market purporting to have turnaround experience and ‘deep pockets’ making a splash with large acquisitions. Freya suggested that this might in due course result in increased prices but so far prices have remained competitive with many participants preferring to walk away from potential acquisitions.

Which sector to watch for distress?

Hamish – Real estate

Elaine – Retail and consumer businesses

Jonathan – Temporary manpower

Anything quirky likely to happen in 2023?

The acronym of the day was ESG, or Environmental, Social & Governance.

Interest in climate change has increased investment and interest in ESG with:

• new specialist funds only interested in investing in ESG projects; and
• contracts being won where ESG forms part of the pitch.

The panel also await further and ongoing developments in the wonderful world of cryptocurrency.

Closing off the webinar, Andrew led a lively Q&A session with guests around the success of operational turnaround, whether current challenges will finally see an end to so-called ‘zombie companies’, and what effect the next UK election might be, only serving to emphasise the number of challenges being faced by the economy and the professional in 2023 and beyond.

Thank you to our panellists for sharing their excellent insights on an interesting year for business, as well as their predictions for the year to come. We hope you’ll join us for more TMA events in 2023, many of which will be in person. Visit the TMA UK website events page to see what’s coming up.