September 2022 Newsletter - Running the slide rule over recovery

September 2022 Newsletter - Running the slide rule over recovery

For thousands of schoolkids and parents, not just in the UK, September has meant a new one of these. Half empty by Christmas and a discarded box by the following July, the Helix Oxford has become an annual repeat purchase for several decades.

Like new shoes, it possibly symbolises readiness for a fresh start but also a willingness to take more care, do things properly and get things right. Many businesses will have begun September with a sense of trepidation and fear of failure as a bleak future for the economy compounds more than two years of Covid, Brexit and inflation woes. Managers shouldn’t waste another day in facing reality and exploring ways to putting their enterprises on a sounder footing. The restructuring and insolvency tool box may be uglier than the Helix, but it’s bigger, deeper and allows far more creativity in finding sustainable solutions. Asking for help is often the hardest part; it can also be the most energising and positive?step towrds getting back on track.

The drawing on the front of the Oxford tin is of Balliol College, alma mater of the previous PM, Boris Johnson. His successor, Liz Truss, was at Merton College, Oxford. New chancellor Kwasi Kwarteng is a Cambridge man. Their days of using mathematical sets are probably over, but with several very tricky sums to do in the coming months, the promise of “complete and accurate” could be tempting.

LOWER INFLATION FORECASTS WON'T STOP BASE RATE RISES

The new PM’s household energy bill bailout?- a price cap of ￡2,500 that won’t benefit businesses – will, alone, stop UK inflation from topping 16%?next year; consensus forecasts have fallen to around 11%.

Despite the ￡100bn programme over two years, the Bank of England’s 2% inflation target will still be hugely overshot.?That means that ‘inflation expectations’, the drivers of workers’ pay claims and companies’ price increases, will remain a strong feature of the UK economy for the foreseeable future. Planned tax cuts are also expected to support consumer spending when households feel less cash-strapped than they had feared when energy bills seemed to be rising infinitely.

Another 0.5% rate increase is expected on 15 September, with more to follow. A further 0.5% hike in November would take the base rate to 2.75%, its highest since 2008. The weak pound, clobbered by continuing inflation fears, will only be boosted by higher rates for the time being. They could easily reach 4%.

Businesses seeking certainty in their debt servicing should review their interest rate arrangements as a matter of urgency. Professional help may be available for renegotiating terms, covenants and securing new lending.

PLENTY OF ROOM AT THE INN

Few sectors are immune from soaring energy costs, but the experience of Covid lockdown in 2020/21 showed that the sensitivity of leisure and hospitality business to dramatic changes in the economic environment is particularly high.

Typically bearing high levels of fixed costs and operational gearing, businesses in these areas clearly take disproportionate hits to profitability when there is a reduction in revenue.?This time forced closure clearly isn’t the issue, but a mixed, or semi-variable cost in the form of hugely expensive gas and electricity, from which there is no escape.

Hotels, restaurants, cafes, resorts and spas, pubs, theatres, cinemas, night clubs and even gyms are all suffering. These are all relatively low margin businesses with very little flexibility in their cost bases. On the revenue side, cash-strapped consumers struggling to pay their own energy bills are, unsurprisingly, expected to tighten their belts on leisure spending in the coming months.

UK Hospitality, the trade body, has called for more government help, including a VAT increase reversal, uncapped business rates holidays, trade credit insurance for energy and generous HMRC time-to-pay schemes. Nonetheless, a remaining major fixed cost for the sector will be real estate, whether that means rent on a restaurant unit or estate, a commercial mortgage on premises such as a club, or a long lease on a hotel. The experience of lockdown suggests that leisure companies, large and small, will again face ?issues around property costs, barely a year after seeing their operations reopen and recover. ?

As in our turnaround and restructuring activities, our favoured approach in resolving real estate issues for leisure and hospitality businesses is to find constructive solutions in the best long term interests of both parties in a contract. Unlike several legal advisers, we do not work exclusively with either landlords or tenants. In recent times, agreeing revised, turnover based rents has been one possibility to keep businesses in this sector operating from their established premises, while remove the risk of a void for landlords.

Beyond premises, fixed costs should be managed as tightly as possible, therefore mitigating the impact of all types of business interruption or unexpected changes Support is available for:

·???Improving efficiencies, productivity and cost saving

·???Hospitality-specific issues regarding tax, VAT, HMRC and PAYE

·???Employment issues

·???Cash flow optimisation

·???Asset reviews

·???Leasing and finance options for equipment

DON'T BE TOO HASTY THROWING IN THE TOWEL

Company insolvencies have continued to rise after the first half of the year, with July’s figure of 1,827 showing an 8% hike on June and 67% on the same month last year Interestingly, the overwhelming majority (1,609) of these were Creditors Voluntary Liquidations (CVL) - in which directors can choose to place a company into a liquidation process?after a shareholders’ vote.

The trend is very widely expected to continue, as energy costs, higher interest rates and reduced consumer spending hit companies’ revenues. Nonetheless, it is sometimes possible for companies to gain a second wind rather than reach immediately for a CVL and it is wise to at least explore and exhaust all possible restructuring options.??For example:

·????????Stay on the front foot with HMRC. Engage and explore a time to pay arrangement. Being unresponsive will only aggravate tax authorities, possibly prompting a legal action.

·????????Revisit repayment profiles for loans and propose realistic, achievable amendments to maturities or phasing. A loan that remains serviced, albeit in a different way, is still profitable for a lender.

·????????Seek a rent concession agreement with landlords or, alternatively, a referral under the rent arbitration scheme under the new Commercial Rent Act 2022.

·????????Consider the new moratorium framework to gain a short period of “breathing space” while pursuing a rescue or restructuring plan. During this legal moratorium no creditor action can be taken against a company without the Court’s permission. The moratorium is overseen by a monitor (an insolvency practitioner) but responsibility for the day-to-day running of the company remains with the directors.

Dealing with significant creditors, such as HMRC, banks and landlords, is a complex process to be navigated carefully. Businesses negotiating with these parties might consider professional advice and representation.??

As ever, the Buchler Phillips approach to business challenges is ‘workout, not bail out’. Don’t hesitate to get in touch for an exploratory chat if your business needs help. Addressing the cracks now will, in many cases, avoid the need to start again.

Our helplines below are open for free initial consultations.

Jo Milner ??????????????????????????????07990 816904

David Buchler ??????????????????????07836 777748

Let’s get to work!

About Buchler Phillips

Buchler Phillips is the UK’s oldest independent corporate recovery and restructuring firm, with a professional heritage dating back to the 1930s.?

Led by David Buchler, former Europe and Africa chairman of global consultancy Kroll Inc, our senior team is equally comfortable advising large corporations, Small & Medium Enterprises (SMEs) or individuals. In addition to decades of experience, each of our Partners brings to any given assignment unique independent insight, free from conflicts of interest, that is often sought but rarely found by clients or co-advisors.

The firm is sector-agnostic, but has particularly strong credentials in property; financial services; professional services; leisure and hospitality; retail and consumer; UK sports; media and entertainment; transport and logistics; manufacturing and engineering; technology and telecoms.

Our activities fall broadly, though by no means exclusively, into financial restructuring, including fraud and forensic investigations; operational restructuring and turnaround; expert witness services and recovery solutions for corporates and individuals.

This newsletter is published for the purposes of general information only and does not constitute advice. Any action taken by readers upon the information above is entirely at their own risk.?