While the M&A market has faced its challenges, it has largely held up during the last 12 months, with many corporate finance advisers reporting, perhaps unexpectedly so, that they have experienced a strong deals flow throughout the year.
But the UK also ended 2023 in recession, with many restructuring advisers reporting that they are also witnessing their busiest period in a while; and corporate insolvencies across the UK in the six months ended 29 February 2024 being c.13% higher than in 2023.
Of course, a strong deals market and an active restructuring market are not mutually exclusive, but these trends do demonstrate that we are living in uncertain times: while some businesses are thriving, others are stumbling, and some are failing.
And, history will tell you that, as an economy eases its way out of recession (as the UK appears to be doing just now), the number of accelerated disposals and/or insolvencies will almost certainly increase.
It’s no secret that the last three to four years has brought about a number of economic and political challenges, resulting in higher energy costs, higher raw material costs, higher labour costs, higher interest rates and, as a consequence, higher rates of cash burn and, in many cases, higher risk of failure.
These challenges are cross-sector, and, while it has seen pockets of growth and a number of M&A transactions, the energy sector is no exception to the underlying market conditions.
And worth noting that the energy sector has an additional challenge with some traditional debt and equity sources reducing their support to the oil and gas sector as a result of their own net zero targets; however, on the positive side there have been alternative lenders and investors stepping in to support the better quality businesses in the sector.
Recognising the challenges that their business is facing is of key importance to a board of directors.
Failure to do so can result in a lack of options, but it can also have a significant impact on their ability to meet their statutory and fiduciary responsibilities.
All too often we are approached by a business when it’s just too late to do anything to implement a turnaround. It’s understood that it is not always easy for a management team to face up to the reality that they need third-party assistance. But it’s incredibly important that they do.
In a distressed situation, having a credible restructuring adviser on board will provide stakeholders with the confidence that this management team is in control.
The directors may not have experienced such challenges before and, therefore, may not be fully capable of navigating the business towards calmer waters.
Building lender confidence is a critical part of retaining lender support. So too is:
- Building a credible business plan which sets out the business’s turnaround/growth strategy as well as its ESG strategy (which is becoming an increasingly important focus for lenders).
- Preparing short and medium term trading and/or cash flow forecasts to support the business plan and to ensure that all parties are aware of what needs to be achieved to stabilise the business and deliver a turnaround.
- Managing working capital such that cash is not tied up for long periods of time and to ensure that, for example, creditors are appropriately managed.
- Realising unutilised assets and/or raising additional or alternative finance, such that the business can generate free cash flow to fund losses, creditor repayments, etc.
- Renegotiating or, where possible, terminating onerous contracts.
- Limiting capital expenditure and rationalising overheads.
- Engaging with key creditors to renegotiate repayment terms, set up time-to-pay arrangements, etc.
These are all obvious steps to take but can often be lost on management teams that are caught up in the detail and the demands of running the business.
Now, some will inevitably point out that it’s no great surprise that here we have a restructuring expert who recommends early restructuring advice.
But we have worked with businesses where management teams have sought early advice and have embraced that advice: and these are the businesses that have averted a crisis and are now back on the road to future growth.
Those that have delayed instructing such advice are typically the businesses that have encountered significantly more difficult challenges, in some cases terminal challenges.
The choice can often be that stark and so, our initial advice is simple: recognise the signs, recognise the need for expert support, and the chances of survival greatly increase.
Fail to recognise the signs and fail to seek expert support, and a prolonged period of distress will, inevitably, result in the directors losing control of their own destiny and an increase in the risk of ultimate failure.
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