What’s happening outside the EU? UK reaction to the pandemic

The quick spreading of the Covid-19 at the beginning of 2020 has shaken the word’s economy and the subsequent lockdown during both the first and the second waves led to the worst economic downturn in history. During the crisis, many Countries have reacted implementing fiscal stimulus measures to support distressed businesses, which led to a net increase in public debt.

However, in the light of the forecasted recovery of the global economy and of the reduced possibility of further total lockdowns, the economic outlook for 2021 should record a gradual growth with a steady improvement starting from 2022. Undoubtedly, during the recovery phase, the Countries that succeeded in better managing the crisis and boost the transformation process (digitalisation, legislation, sustainable economic models) will attain an indisputable advantage.

Basing on the above, we started our discussion with Andy Charters, Partner Restructuring Grant Thornton UK LLP, in order to understand how the UK dealt with the emergency and how is it shaping its future.

The UK market: the management of the pandemic and future scenarios

The UK government sought to alleviate some of the financial strain imposed by Covid-19 pandemic on both private and public sectors with a suite of schemes such as furlough, business interruption loans and tax deferrals.

In addition, new legislation came into effect with the introduction of the Restructuring Plan and Moratorium processes, both of which were intended to give companies sufficient breathing space to restructure their debts and implement turnaround plans. These are positive solutions that should help some underperforming businesses to navigate 2021 and beyond.

The Restructuring Plan introduces the ‘cross-class cram-down’ which enables companies to limit the influence of dissenting creditors when presented with a viable restructuring proposal, as long as considerable support from other creditors is provided.

The Moratorium gives companies breathing space to devise a turnaround plan, focusing on the rescue of the business rather than the realisation of assets. It protects companies from certain creditor action for an initial 20 business day period, which can be extended or terminated early.

In addition, a temporary halt was imposed on the use of statutory demands and winding-up where a company is unable to pay its debts as a result of the Covid-19 pandemic.  

For further information on the UK Government support can be found at: Navigating government funding support | Grant Thornton

Which are the consequences for banks?

The banks in the UK played a central role in assisting the UK government in delivering several of the support schemes and have sought to be pragmatic and responsible when approached by borrowers facing challenges meeting covenant tests or facing liquidity crises. This was carried out against the backdrop of the new working environment with a large number of bank staff having had to adapt almost overnight to remote working. 

As we go through 2021, the economic impacts of COVID-19 as well as the recovery process for loans made under government-backed lending schemes will become clearer. We are currently seeing very high levels of liquidity in the market and what is not clear is whether that will continue through 2021 or whether some of the reported liquidity positions are artificially inflated because of the continued government intervention (especially through the furlough scheme).

As is the case globally certain sectors such as retail, real estate, travel, tourism/leisure and hotels, have been more severely impacted by Covid-19 pandemic. Institutions with higher degrees of concentration to these sectors will need to monitor their positions carefully as we move through the next phase of the pandemic and economic recovery.

Whilst we have not yet seen a significant rise in insolvencies in the UK to date, we anticipate that there will be an increase in distressed situations and insolvency appointments starting in Q4 2021 and moving in to 2022. This will place increased pressure on internal systems, processes and management teams in the banks.

Further details on how we can assist banks and businesses can be found at: UK banking sector: top ten themes for 2021 and beyond | Grant Thornton

Which are the consequences for businesses?

Restructuring and insolvency data for Q1 of 2021 shows a continuing low level of formal UK insolvency appointments, but we are seeing a busy corporate finance environment and transactions in the mid-market were very strong in the first quarter. Restructuring advisory projects continued at 2020 levels, particularly lender-led, with a leaning towards real estate, travel, tourism, hotels and leisure.

As expected, we are seeing the impact from the extension of government support, and the general prohibition on creditors petitioning for the winding-up of companies until, at least, 30 June 2021. This continues to act as something of a life-line for businesses that may otherwise have fallen into the distressed category.

It is anticipated that this will continue for the foreseeable future and mid-market insolvency appointment are not expected to start increasing substantially until Q4 (or perhaps H1 2022), at the earliest.

Further details about our view for 2021 can be found at: Restructuring review Q1 2021: what does the future hold? | Grant Thornton

How can financial advisors support banks and businesses?

Throughout 2020, our restructuring and insolvency team has been busy on a wide variety of assignments. Projects have not only focused on the well documented sectors of retail, travel, leisure and tourism and real estate, but also in financial services, oil and gas and healthcare. We have one of the largest restructuring and insolvency practices in the world, with a truly global reach.

Uncertainty and challenge inevitably lead to opportunities. It's likely that the number of carve-outs and businesses for sale will increase in 2021, as companies’ cash flows unwind and new operating models become established. This will lead to opportunities for those with funding or able to access funding to fast track their growth.

Further details on how we can assist banks and businesses can be found at: UK restructuring credentials 2021 | Grant Thornton