The turnaround view for 2022

Opinion By Milly Camley

During the pandemic, even businesses that were in good health found themselves unexpectedly vulnerable to disruptive external forces. For those that were struggling before, Covid-19 added an extra layer of risk.

Unlike most previous crises, it was not triggered by financial stresses or commodity prices, and it had no respect for geographic or sector boundaries.

The pandemic threatened to push viable companies to the wall, with potentially devastating impacts on the economy, jobs and livelihoods. Due in a large part to the comprehensive support put in place by the government, that didn’t happen.

Insolvencies fell in 2020, even though the number of distressed companies rose. The transformation and restructuring professionals we represent also played their part. Our members have worked hard to help businesses navigate the immediate financial and operational difficulties arising from the pandemic.

IFT independent turnaround directors and corporate partners helped companies save over 200,000 jobs in 2020. However, the proportion of distressed companies seeking turnaround management services remains very low. If just 4.5 per cent more distressed firms sought its members’ support, we estimate that jobs saved could be 10 times higher.

As government support has tapered, insolvency rates are returning to pre-pandemic levels and distress rates are rising. Businesses need to pay down debts, restore their activity levels, repair their finances and respond to a range of long-term structural changes – not least to their supply chain – if they are to be part of the recovery and renewal story.

Pandemic effects: winners and losers

In general, retail, leisure and hospitality businesses bore the brunt of lockdown, with the pandemic further exacerbating existing difficulties in the high street retail and casual dining sectors.

Manufacturers, particularly in the automotive sector, have been constrained by a shortage of semiconductors since economies re-opened. The biggest winners were logistics firms, online companies, and those bricks and mortar businesses that were able quickly to shift their business online.

Wales and the West saw the highest rate of distress during 2020, with 4.16 per cent of firms struggling. The Midlands recorded the lowest

However, the determining factors between winners or losers are often finely balanced, with a single characteristic such as which sub-sector niche or ability to attract investment heavily influencing outcomes for a business.

Key challenges in hospitality are not limited to demand, with debt accrued and operational challenges such as worker shortage looming.

Commerciality has to return, and striking the right balance between rising operational costs whilst achieving service delivery, in line with servicing higher levels of debt and accrued liabilities from the pandemic, will be difficult over the next two to three years.

In terms of the picture across regions, firms in Wales and the West saw the highest rate of distress during 2020, with 4.16 per cent of firms struggling. The Midlands recorded the lowest rate of distress at 3.86 per cent. However, 45 per cent of distressed firms were in London and the south east, reflecting the size of the regional economy.

That picture is likely to change to some extent as sectors are impacted in phases and by different challenges such as labour and supply chain issues and inflationary pressures, particularly rising energy costs; the pressures for manufacturing will provide particular challenges in the Midlands.

As the economy re-opened, businesses had to grapple with a new set of financial challenges, including working capital and cashflow. Some businesses have needed to find a lot of money to re-open, such as hotels that need to restock.

Companies that, during the pandemic have been operating from one day to the next, now need to address the long-term challenges

Business will need help with short-to-medium-term financial forecasts. These will depend partly on forecasting future demand, a task that has become more challenging as Covid has changed established patterns of working, living, shopping and transport.

During the past 18 months, businesses have accumulated many different liabilities, and the question is whether they can generate enough cash to meet repayments as they fall due. Trying to bring down debt while managing the daily operations of the business will stretch management teams. Businesses may need to negotiate with their lenders, their landlords and other stakeholders.

Operational demands and transformation ahead

The financial challenges businesses face have been compounded by daily operational disruptions, including shortages of products, components, labour, as well as logistical challenges in the supply chain. A range of turnaround challenges have been accelerated by the pandemic.

There is a widespread expectation that demand for operational restructuring will swiftly follow financial restructuring, and the experience of turnaround professionals has shown that some businesses have used the pandemic to effect operational transformation.

Financial restructuring is sometimes an end in itself but is often a temporary mitigator that buys time to examine the root causes of the problems, which can be operational or market based in nature.

Companies that, during the pandemic have been operating from one day to the next, now need to address the long-term challenges that have been thrown up by Covid and Brexit, including the impact of technology on business models, labour shortages and new ways of working.

Looking ahead, ESG has become a key driver for change, accelerated by both the pandemic and by COP 26. This is a major and theme for investment, backed up by strong regulation, and thus will flow from the largest businesses down to micro enterprises in manifold forms.

Almost three-quarters of IFT members reported cultural or psychological resistance to external advice as the key reason why businesses didn’t seek turnaround advice when they found themselves in distress.

Whether they are referred by lenders, advisers, or professional networks, turnaround directors are unequivocally on the company’s side, and bring their experience and expertise to bear to turn a company’s fortunes around.

Against that cultural reluctance, there has already been a big leap forward in the past two decades, moving from an insolvency culture to a turnaround or recovery culture, so viable companies are no longer simply going under.

Dealing with the complexity of the financial landscape will be especially challenging for SMEs, many of whom needed help to access government schemes when they were made available, and will need support in finding the right approach to refinancing.

There will be no one-size-fits-all answer but financial discipline will be key, which is why turnaround directors’ expertise in financial forecasting, cost reduction and stakeholder management has been in most demand during the pandemic, and alongside operational transformation will play a key role in the recovery.

Milly Camley is CEO, the Institute for Turnaround