15 Jul 2020 | 12.22 pm
Guest Blog: Luke Charleton, EY Ireland
'We will see many consensual and informal restructuring arrangements occurring over the next 12 months'
15 Jul 2020 | 12.22 pm
The road to recovery from the COVID-19 pandemic will be challenging. A tight focus on cost management will be essential for businesses to survive in the immediate term, but many will need to consider restructuring options also to emerge from the crisis in a position that will allow them to recover and ultimately succeed in its wake, writes Luke Charleton, Transaction Advisory Services Leader at EY Ireland.
As we navigate a path through the easing of the COVID-19 lockdown restrictions, businesses must look at what they need to do now, next and beyond this crisis. To date, the focus for most businesses has been on protecting their people, conserving cash and doing less with less, particularly where the business or a significant part of it has been put into enforced hibernation.
Businesses have been making pragmatic decisions to manage costs while prioritising operational stability. This has helped the continued development of business resilience as we look to move into the next stage of this crisis.
In many instances, businesses have been availing of the Temporary Wage Subsidy Scheme, forbearance from lenders and credit under the credit guarantee scheme. The Government has taken swift action to provide a range of additional schemes also that aim to support businesses, including the Strategic Banking Corporation of Ireland COVID-19 Working Capital Scheme, and the COVID-19 Business Loan from Microfinance Ireland. While these are to be welcomed for entrepreneurial businesses and startups, they do less to address liquidity concerns among larger businesses that don’t meet the eligibility criteria.
The next phase of this crisis presents its own challenges. What does it look like for businesses coming out of hibernation? There are costs associated with re-opening and it’s not yet clear what support from Government will be put in place. Indeed, when the Temporary Wage Subsidy scheme expires as people return to work, re-opening will place heavy cost pressures on many businesses, not least for the retail and hospitality sectors.
In closing those gaps, all cost lines in the business must be examined. That will include continuing to minimise discretionary spend beyond this phase and cutting out other costs completely. It will also involve difficult decisions on what segments of the business to re-open and what should remain closed, for the time being at least. Other aspects will include hiring freezes and keeping wage costs at current levels.
However, where any level of uncertainty exists or emerges around a business being able to continue to trade through these financial difficulties, it’s important that leadership take steps to engage with both creditors and lenders at an early stage. This will allow them to articulate the impact the current situation is having on them, and to negotiate amendments to their agreements where possible.
We will see many consensual and informal restructuring arrangements occurring over the next 12 months. However, these will only be possible where the businesses concerned have been in early and are engaging in open and continual communication with all of the relevant economic stakeholders, including employees, banks, other finance providers, external equity partners, suppliers and customers. It is important to note that the banks have openly articulated willingness to engage constructively with businesses in such circumstances.
These are not the only sources of support available. Depending on where a business sits in the supply chain, finance may also be available by means of extended terms from suppliers or customers who wish to extend support to protect supply. For example, a highly-valued supplier may find that larger customers are willing to pay on delivery or even in advance for a period in order to ensure continuity of supply. On the other hand, suppliers could be willing to extend credit terms to assist customers with their cash flow.
Businesses that entered the crisis with pre-existing balance sheet challenges are likely to have to undertake some form of restructuring process if they are to survive. Examinership is a proven, effective methodology of doing that in Ireland.
Examinership is a turnaround mechanism which was introduced in 1990 to protect employment and businesses from one-off shocks. In a nutshell, it gives businesses the ability to restructure the balance sheet and operations where appropriate and exit the process with a stronger capital structure and retention of the profitable elements of the business. It gives companies the opportunity to obtain new investment and put firm financial foundations in place for the future. We expect to see a significant number of examinerships emerge in the coming months.
Seeking the positives in the current situation, one major difference between the current crisis and the Great Recession of 2008 to 2012 is that there is much more investment capital available. There is an appetite among investors to take equity stakes in well-run companies with robust business models.
Companies with strong management that have been historically profitable will continue to attract investment in the current environment. Indeed, we see this among our own investor client base at the moment, with many private equity funds and lenders seeking good-quality businesses to invest in.
Beyond The Recovery
Looking beyond the recovery phase, the picture will vary significantly across the businesses landscape. Sadly, not every business will have the same experience in how they weather this storm, and the unfortunate reality is that some won’t come out the other side. Stronger businesses will see opportunities for consolidation. They will need funding to take advantage of those opportunities if they can’t finance it with their own resources, which will present opportunities for investors.
This crisis will bring about fundamental changes to business. This crisis will prove to be a catalyst in the acceleration of technology. The use of data and the emergence of AI and other technologies will be even more pronounced as we emerge from the crisis.
Consumer patterns are already changing, and businesses with the greatest agility that react fastest will do best. Supply chains will be re-examined. Companies will have to decide if they want to remain as reliant as they were on long supply chains, which will create opportunities for suppliers closer to home.
The current situation is overwhelming and there is a huge amount to consider, not least the health and safety of employees. But it’s important the businesses allocate the sufficient time and appropriate resources to examining the issues at stake and the considerations for a strong recovery now.
It’s crucial that focus needs not to be exclusively on COVID-19 impacts to the exclusion of the other macro trends and forces which were shaping the world before this. The majority of the trends and challenges faced by businesses before the COVID-19 crisis will continue to exist, and cannot be ignored.
The disruptions and restrictions which have been a feature of global trade for the past number of years are likely to continue in some form. Climate change had moved right up government and corporate agendas in the period running up to the COVID-19 outbreak, and will come back again very quickly once the current crisis abates.
And then there are the negotiations between the EU and the UK in relation to the post-Brexit trade agreement. We will know very soon if there is to be an extension to the Transition Period and the shape of any trade deal, if there is to be one, should be clarified by the end of the year. Either way, trade between Britain and Ireland will have to adjust.
All of these factors still loom in the background and will reassert themselves as business returns to something approximating normality. Businesses must prepare for that now, as well as for the semi-permanent and permanent changes caused by the COVID-19 pandemic and its aftermath.
• To find out more visit ey.com/ie/covid-19
Photo: Luke Charleton, Transaction Advisory Services Leader, EY Ireland