By Suzy Bibko, Content Marketing Manager, EMEA
COVID has created challenges for many businesses and left more than a few wondering what the future holds for them – if they can survive. The European Commission has predicted that European companies will lose €120 billion by the end of the year and 25% of those with more than 20 employees will exhaust their cash and working capital by the end of this year. So, how can companies stabilize and move forward? We recently discussed how the restructuring landscape in EMEA is changing at our recent webinar, held in partnership with the Financial Times, where Peggy Hollinger, Melissa Coakley, Paul Kirkbright, Matthew Prest, and Merlin Piscitelli examined how attitudes, options, tools, solutions, and support are all changing, as companies try and plow a new path forward.
It’s a well-held view that the current economic crisis is different than the last, in that this time the root is not in the financial system itself. Moreover, lessons have been learned and support has been made available quickly. We’re seeing governments implement economic reforms and approve support schemes in record time to help businesses survive.
"There had already been a period of reform of restructuring and insolvency law that has been going on across EU member states, and COVID accelerated that pace of change," explains Coakley. "Governments have implemented incredibly far-reaching and helpful temporary measures to give companies breathing space during the pandemic. The UK has been spearheading these efforts, with the introduction of the Corporate Insolvency and Governance Act that came into effect in June. It’s an incredibly ambitious piece of legislation that was rushed through in record time to try and help navigate the post-COVID environment. Practically it is likely to provide assistance not just for UK companies, but also for European businesses because traditionally UK restructuring processes (such as schemes of arrangement) have been used by European businesses. This is highly likely to continue with respect to the new cross class cram down procedure (or "super scheme") introduced under the new law, at least until other European jurisdictions implement their own equivalents."
But what happens when those schemes end? Seven months on from the start of the pandemic, are we starting to see a more real economic picture? Piscitelli thinks so: "Because of government stimulus programmes across the EMEA region, people were waiting and assessing the markets to see what options were available to them. In terms of our projects, there wasn’t a huge wave of restructuring initially. But now we’re starting to see significant growth on a month-to-month basis – a 26% increase in restructuring-led projects from March to date led by a wide range of financings to shore up balance sheets, which is buying time until proper restructurings commence. Right now is all about assessing business plans and models ahead of what should be a long run of restructurings."
Prest agrees: "Looking at what’s happened in previous crises, I expect we’ll see an increase in corporate default rates over the next few quarters, as they tend to lag an actual economic recession. In the last global financial crisis in 2008 we saw restructurings playing out over 2010, 2011, 2012. I think it’s going to be a more drawn out process."
"It’s clear that restructuring is on people’s radars," continues Piscitelli. "Our report, The New State of M&A, which surveyed over 2,000 M&A practitioners globally in February to April, found that 32% of them expect debt-financing to dominate over the next 24 months, followed by divestitures and carve-outs at 25%. And among EMEA practitioners, debt-financing rose to 40%."
Moreover, there is a healthy war chest available to fund acquisitions. "There is a real difference in the options now than with the last financial crisis," says Kirkbright. "There is liquidity everywhere and private equity funds with trillions on tap. There are distressed investors, specialist distressed funds that are sitting on huge amounts of liquidity looking to deploy it into exactly these kinds of situations. I think the stressed or challenged companies will need to choose which option to go with."
Preparing for a different path, quickly
So, how do you decide what to do? "You need to bring your stakeholders on board and you need to give them a confidence that you're in control and you do that by being prepared," explains Kirkbright. "Engage early with good quality information and be ready to think about a wider range of potential solutions. Changing times require you to be open-minded about them. You might come out with this with a different shape to your business, to your capital structure. That doesn't necessarily mean it will be worse, it just could be different."
And once you decide your path, how quickly can you safely complete the journey? As the saying goes, time is money – and every second, and penny, counts for those on the brink of bankruptcy. And this is where new technologies come into play. "When you start to think about the amount of data that needs to be collected and reviewed in a restructuring, you think about processing speeds," says Piscitelli. "How do you increase speed? And how do you manage security and authenticate with multifactor authentication for people working from home to make sure the data remains safe, How do you collaborate across multiple organizations on the deal teams? At Datasite, we look at innovative tools that are going to facilitate that flow of information securely and help people get their deals done."