Those of us in the restructuring community are all too aware of the “ripple-out” effect caused by the financial deterioration and failures of multi-national companies on the wider supply chain and customers in general.
Against the looming backdrop of “stagflation”, research from EY suggests 64 UK-listed companies issued profit warnings in Q2 2022. This is a 50% increase compared to the previous quarter and some 10% above the pre-pandemic averages. The top reason given by these large corporates for the profit warnings is increasing cost pressures, not a surprise given inflation is running at a 40 year high.
Whilst the tangible impact of these profit warnings may take some time to work out, this only serves to dial-up the increasing stress on some of the larger SMEs and mid corporates that supply them. They are the ones who may be subjected to a “take it or leave it” sudden renegotiation of terms (which ultimately leads to a further erosion of margin) or an extension of payment terms, thereby increasing the likelihood of failure.
Over the last 6-9 months, closer analysis of the insolvency statistics shows us that CVLs have increased dramatically (the numbers are now higher than pre-pandemic levels) but these companies are typically smaller SMEs. Continuing PLC profit warnings and potential failures may be the start of a trend which sees more of the larger SMEs/mid corporates requiring an operational restructure (which they may have resisted over the last 2 years) or a formal insolvency (via an Administration, Restructuring plan or Moratorium process) in order to remain viable.
It’s unsurprising that those sectors most closely correlated with the strength of the wider economy are most at risk. In our experience and as borne out in the statistics, companies that operate in construction, manufacturing and leisure and hospitality are most likely to have the highest “death rate”, compared to others.
Anecdotally, we have heard from our contacts in the banking community that some customers are so severely financially distressed and without a cash runway to support exploring alternative options, that they are bypassing the bank’s restructuring teams and moving straight into recoveries straight from the mainstream teams – thereby producing a sub-optimal outcome for all stakeholders.
Directors may have successfully navigated their businesses through the turmoil created by coronavirus (likely only due to the unprecedented support provided by the Government,) but this time it’s very different.
The skillset required of directors to not only diagnose potential problems early but also to take those, often difficult, operational and financial decisions has never been more demanding and complex. It’s therefore crucial that professional advice is sought at the earliest possible stage to maximise the options available and prevent an insolvency.
The big UK earnings crunch is still to come