John Fairbrother, office managing partner at Begbies Traynor in Liverpool, gives his view of what’s happening in the British economy
Business growth across the UK and the North West has seen a definite and welcome rise over the start of 2014, with numerous surveys painting a picture of slow but steady growth across a range of sectors.
The first quarter of the year saw the fastest expansion in business investment for two years, according to Office of National Statistics (ONS) figures, with business investment growing by 5% – almost double what had been expected. The ONS said business investment contributed 0.4% of the 0.8% economic growth in the first quarter, and UK economic growth of 3% was still the strongest since 2007.
The latest Begbies Traynor Red Flag Alert for Q1 2014, which monitors the financial health of “Corporate UK”, also revealed that levels of ‘Critical’ financial distress among UK businesses decreased by 7% year on year, from 3,283 in Q1 2013 to 3,063 in Q1 2014.
Building on the steady return of optimism over the past year, 2014 has seen a return of confidence to the economy, leading many firms to put into play expansion plans that they may have had on hold for some time.
With its strong heritage in manufacturing and international trade, the North West has seen an impressive resurgence of its economic fortunes. Its thriving media and service sector is also putting the region at the forefront of the wider economic recovery across the country.
This growth brings with it a range of opportunities for both SMEs and larger corporates to take advantage of the gathering economic momentum and look at new expansion opportunities at home and abroad.
The International Festival of Business 2014, currently being held in Liverpool, is a great way of showcasing the wealth of regional talent and highlighting the range of opportunities for growth, as well as sharing the range of support and guidance available from business support organisations such as UKTI, the local Chambers of Commerce and Local Enterprise Partnerships.
Many North West businesses have also used the recession as an opportunity to explore new export markets, as demand for British-made products remains strong overseas. Britain’s export of goods hit a record high in 2013 with December’s trade figures from the ONS revealing that the UK firms exported £304.3bn of goods last year; an increase of 1.3% from 2012. This will certainly have been a huge boost to overall GDP growth last year, with the balance between imports and exports also starting to move in the right direction. While Europe remains a key export market, the slower recovery of the Eurozone means that British firms should continue to target markets further afield.
However, North West businesses should also bear in mind the need for a responsible recovery, avoiding the understandable temptation to overtrade as prospects improve. While the return of confidence is welcome, it is also important to proceed with caution and build sustainable businesses on solid foundations rather than growing too quickly.
Despite the widespread misery caused by the recession, businesses across the North West may have actually benefited in some ways. Those firms that have made it through are now leaner, fitter and better equipped to compete both at home and overseas.
Similarly, the issue of so-called ‘zombie companies’, which are just surviving but have little prospect of making any real headway into paying off their debt, is also being addressed to ensure that they are either restructured to help them grow or wound down constructively. The removal of these firms from the marketplace not only reduces competition, but also frees up underused assets that can then be ‘recycled’ by other businesses.
It may yet take some time for the economy to truly reach a point when it can be described as flourishing, but having learnt lessons from the mistakes which led to the recession, firms will be able to rebuild on much more solid ground.
This places North West firms in an ideal position to take advantage of their workforces and facilities to seize new opportunities as markets continue to recover, and to ensure that future growth is fully sustainable.
Daniel Smith, partner at Grant Thornton UK LLP, examines how the emergence of non-bank lenders are providing businesses in the mid-market with more opportunities for growth
The funding landscape for mid-market corporates has changed substantially over the last five years led by the proliferation of non-bank lenders. These firms, which lend to businesses but do not accept deposits, are not merely new entrants competing against the banks – they are instead driving innovation across the industry with a new and different offer to the traditional lenders.
Our research, which surveyed 100 mid-sized businesses and 100 non-bank lenders, recently revealed that 61% of corporate respondents have used a non-bank lender. But what benefits do non-bank lenders offer mid-sized corporates and do they face any obstacles to further growth?
Non-bank lenders (such as credit funds, private equity firms with a direct lending arm, junior debt funds, and asset backed lenders) earn their return by having their money at work. They mostly do not seek ancillary revenues from transactional services and hedging, which are essential profit streams for banks.
Perhaps more significantly, non-bank lenders can be attracted to alternative funding structures such as non-amortising debt, where a substantial portion of the loan is not repaid during the loan period, because the total interest they receive remains constant.
These bullet repayment structures can be hugely beneficial to a mid-sized business, as it opens up the possibility for them to invest more of their operating cash flows into fuelling further growth, rather than paying down debt.
As a result of benefits such as these, corporates have become increasingly aware of non-bank lending activity with virtually all corporate respondents (92%) thinking that these firms have been ‘active’ or ‘very active’ over the previous two years. In addition, non-bank lenders are viewed in an encouraging way by corporates with 79% of them agreeing that these firms are perceived positively or very positively.
However, despite this activity and the clear benefits non-bank lenders present, there still is a gap in understanding between the lenders and the corporates. In the past year, 15% of non-bank respondents have started more than 15 deals but only 2% have completed this number.
When considering why deals were not completed and what misperceptions need bridging, the following were highlighted in our research:
Despite these perceptions however, our research found that 45% of non-bank lenders are looking to invest over the long-term (10 years or more) and offer a range of interest rates from 5 to 15% with the majority (37%) settling at 10%.
These worries do however indicate that non-bank lenders need to do more to improve communications with corporates over these misconceptions. If they can tackle these misunderstandings there is surely room for further acceptance and growth, especially amongst the fast growing mid-market.
Tony Murphy, partner at insolvency practitioners Harrisons – Business Recovery and Insolvency Specialists, offers a reality check on the enthusiastic response to Teresa Graham’s recommendations for greater transparency in pre-pack deals, aimed at boosting creditors confidence in the process and improving both the survival rates of the new businesses and their potential financial returns.
There’s no harm in having the value of pre-packs as a rescue tool endorsed by an independent third party and IPs across the UK are no doubt pleased to hear Teresa Graham reiterate what those of us at the coalface already know – that pre-pack deals can play an important role in rescuing a struggling business, often preserving its value and bringing returns to creditors while at the same time reducing the likelihood of casualties among key employees or loss of contracts.
But, Ms Graham feels, we can do better: pre-packs should be more transparent and deliver better outcomes for customers and the small businesses affected when companies go bust. Her recommendations are supposed to achieve this, and she promises greater transparency and a higher survival rate for the new business, as well as improved financial returns.
Noble aims indeed, and while ‘proper valuations’ and insured valuers are ‘quick-fixes’ that no IP worth his or her salt will object to, and removing the need to report to the Insolvency Service reduces red tape, her proposed alternative is somewhat less encouraging.
A ‘Pool’ of independent business experts will review the details of each pre-pack and have the final say whether or not it can go ahead – an idea designed to bring comfort to creditors and reassure them that the deal isn’t simply a cosy cover-up.
This sounds fine in theory, but will it work in practice? Who will sit in the Pool? How will they be chosen? What will the cost be? And is it realistic to believe that each case referred to the Pool will receive an intensive and pragmatic review – which by necessity will need to be turned around at speed – or will the process become a rubber stamping exercise?
Surely it is the role of the IP, using the information to hand and their extensive training, knowledge and experience to make these decisions? How will the Pool replicate that knowledge without prolonging what is undoubtedly a time-sensitive process and add value to the outcome?
And what if the Pool actually says ‘no’? It wouldn’t be easy – or comfortable – to have to go back to the directors and explain that despite everyone’s hard work, some faceless reviewer has decided that, contrary to the expert recommendations of the IP, a pre-pack isn’t a good idea. What happens then?
More cost, more uncertainty, more delay and more layers of bureaucracy – and for what purpose?
After all, pre-packs are a small portion of all insolvencies, even if the majority of them do result in a sale to connected parties. And here’s the rub. Ms Graham believes that sales to connected parties (typically former directors or owners) often result in poorer creditor payouts and the likelihood that the new business will struggle to succeed.
But we all know that there are times when no-one other that the existing management is prepared to give the business a second chance, so surely their enthusiasm and support should be encouraged rather than sending the business to the wall? At least that way something is saved – despite the clamour of unhappy creditors.
I have always believed that the primary purpose of any insolvency process is to maximise recoveries. If I’m wrong, then perhaps Ms Graham would have been wiser to recommend a change in the law to prohibit sales to connected parties. But if I’m right – and the industry is already echoing similar concerns, despite the fact that the trade bodies appear to be accepting the recommendations without reservation – then surely there is already sufficient legislation in place to stop Phoenix-ism and the Pool is simply a means of pacifying those who shout loudest.
Two years after the insolvency reforms took place in Germany, the country is starting to assess the benefits from the changes, says Annerose Tashiro, partner and head of the cross border restructuring department at law firm Schultze & Braun
Partner and head of the cross border restructuring
1 March 2012 saw Germany revolutionise its insolvency laws, with new legislation moving in line with UK and US practices. Providing debtors and/or creditors with more control over the insolvency proceedings, the reforms sought to improve the legal framework of corporate restructuring in Germany.
Two years on, the dust has started to settle. The implementation of the changes have slowly been accepted and there are two key areas where the benefits can be seen.
1) The selection of insolvency administrators
Insolvency administrators had to be truly independent prior to the reforms. This meant that being suggested by a stakeholder would contravene the notion of being independent, making it difficult to recommend suitable experienced administrators.
The reforms have shifted the focus by allowing stakeholders to provide an opinion – they can consent to become a member of the preliminary creditor committees, and once accepted to the creditors committee can air views about administrators which will be listened to.
Once an appointment has been assigned, the courts will only be able to reject the administrator if that person is deemed not fit for the job.
With banks being one of the largest creditors, the new reforms created the opportunity for them to have more influence on the appointment of the insolvency administrator and with the direction of the case. The early written consent to serve on the preliminary creditors committee was treated with trepidation by the banks at the beginning. However, over the past year the banks have adapted to the new circumstances and requirements.
2) Protective shield procedures
Prior to the reforms, debtors who found themselves in financial difficulty had few options to find a solution to its problems.
The reforms have created the protective shield, where debtors that are not yet illiquid can be granted three months to submit an insolvency plan. This application for a protective shield has become fairly popular with debtors who have found themselves in financial troubles.
This has the usual insolvency law featured benefits of the court appointing a preliminary insolvency administrator or moratorium to prevent any further foreclosure actions.
The influx of applications was greater than the courts had predicted, so it has taken time for them and the professionals to find their feet with the process.
Only those debtors who are at risk of becoming insolvent, but are still able to pay their debts and liabilities, on top of a feasible reorganisation, have been able to qualify for this protection. However, it has become clear that there are a number of businesses that are too far gone along the insolvency route – this protection could not help them in the long run and proceedings evolved into ordinary insolvency administrator later on.
The 2012 reform has been beneficial to those businesses which required the support to an early restructure.
The result of the changes are clearly visible within the insolvency sector. The awareness of restructuring-friendly procedures has increased and thus the perception of such in the public has changed. This – hopefully in the long run – will trigger the management of struggling companies to seek early advice from restructuring professionals.
The reforms to the insolvency regulations have demonstrated already that it is possible to find a suitable solution for the debtor and also for the creditor.
The adoption has been slow in some places and sometimes stretched a bit too far. Nonetheless, the changes have moved in the right direction.
The government-commissioned review of pre-packaged administrations by Teresa Graham was released on Monday 16 June, proposing potential pre-pack deals should be scrutinised by a panel of “experienced experts” before going ahead. Insolvency News presents a round-up of reactions from leading industry figures.
Teresa Graham, CBE
“My review of pre-pack administrations over the last nine months shows that they have a unique place in the insolvency market.
“However there must be major changes in the way they are administered. I believe my proposals, implemented as a complete package, will lead to real improvements in pre-packs. I hope the insolvency industry, as well as all those in business, will embrace these measures as it is in everyone’s interest that they are successful. I believe they will lead to real improvements in transparency and scrutiny.”
Jenny Willott, business minister
“When these types of business sales are carried out properly, they allow the viable parts of the business to continue operating and jobs are saved. But it is also important for those who are owed money to know they are getting the best possible deal in the circumstances. Transparency is vital.
“Teresa Graham has come up with a set of recommendations which will ensure people get back as much money as possible and make pre-pack deals more transparent. We will be working with business and industry to implement these recommendations in full and we believe it will help restore trust and confidence in pre-pack deals. We will monitor progress closely and will take the power to legislate if necessary.”
Vernon Soare, director of professional standards, ICAEW
“Teresa Graham’s recommendations tackle the myths about pre-packs. We are pleased the review shows that when pre-packs are done properly, they can bring big benefits to the UK economy because they save jobs and costs. However, we understand that those involved in insolvency proceedings need to trust the pre-pack process, which is why we support the review’s recommendations to improve its transparency.
“We specifically support the recommendations that directors should take more responsibility about the ongoing viability of Newco and that there should be independent scrutiny of a deal before the event. As the government develops its response to the review, we will be very happy to share our expertise to establish the proposed pre-pack panel.
“As the largest regulator of insolvency practitioners, we are happy to engage with the government to make these proposals work in order to maintain the pre-pack as a legitimate tool of the UK’s rescue culture.”
Giles Frampton, president, R3
“Teresa Graham’s report is an excellent contribution to the pre-pack debate. We fully support her conclusion that there is a place for pre-packs in the UK’s insolvency framework.”
“As the report says, pre-packs can help save jobs and do provide benefits for creditors too. The report will help dispel some of the myths that exist around the pre-pack procedure.”
“Debate around pre-packs has long suffered from a lack of empirical evidence. This report helps plug that gap.”
“The report’s recommendations are innovative, measured, and worth exploring. Balancing transparency and the need to protect the value of a business in difficulty is difficult to achieve: many of the review’s proposals may help redress this balance.”
“It is also encouraging to see the report’s recommendations focus on more than just the insolvency practitioner’s role in a pre-pack. Instead – and rightly – the report turns the spotlight on directors involved in a connected party pre-pack.”
“We very much look forward to seeing the government’s full response to the report’s recommendations, which we are keen to see developed.”
Phillip Sykes, head of restructuring & insolvency, Moore Stephens LLP
“The Graham Review has done an excellent job in producing research that shows the vital role pre-packs play in helping struggling businesses preserve jobs whilst maintaining as much value as possible to repay creditors.
“Injecting transparency into pre-packs with a connected party is a very sensible idea that will help to reassure creditors that they are getting a fair deal. The review provides a broad framework for this to happen, but it will be crucial to get the details right to avoid the risk of unintended consequences that might deter the use of pre-packs.
“There is a real risk that the amount of information included in the reports for the pool becomes unmanageable, as existing business owners try to protect themselves from any potential litigation by disclosing as much as possible in their pre-pack proposal.
“If pool members are swamped in documents this could make it very difficult for pool members to make an informed decision within half a day.”