As ever, ‘back to school’ and the shift into Autumn provides an opportunity to reflect on the state of play in the UK economy. For the last few years – thanks in no small part to factors outside of their influence – September has been a time when clients have been seeking a lighthouse via which to avoid the rocks. 

However, for the first time since perhaps before the pandemic and Brexit negotiations, there is a greater sense of optimism in the air. Indeed, Lloyds Bank’s most recent Business Barometer charted SME business confidence as being more than 20 percentage points above the long-term average, while confidence in the economy itself has reached a near three-year high.

Balancing out

The concern is that some of this optimism, while supporting the likelihood of increased private investment, may find itself tempered in the coming months.  

Indeed, the Insolvency Service recorded the second-highest number of company insolvencies since 2009 as recently as July, having seen elevated levels throughout the past 12 months. 

Clearly, we have the outcome of the General Election to thank for some of this conflicting data. And, while the impetus a new government brings will likely stimulate a bounce in business activity, we can expect to see a ‘balancing out’ in the fial months of the year.

A more active restructuring market

This backdrop prompted my colleague, David Hudson, to comment in The Sunday Times recently that we may see formal restructuring shift up another gear this Autumn. 

A particular factor is the maturing ‘debt wall’, with pandemic-related loans nearing the end of five-year terms. There has been a significant amount of commentary about what this will mean for SMEs, and specifically commercial landlords operating in retail and leisure, whose tenants are struggling to meet their obligations.

Construction also continues to be active in the restructuring market due to the knock-on effects of inflation and the cost-of-living. Inflation has not only contributed to the cost of builds going up (materials, supply chain, wages) but interest rates have stymied demand among developers and in the mortgage market.

Of course, some of those pressures may well ease with interest rates expected to fall. But there is also a natural lag between commercial stress and restructuring which has not yet played out. 

Falling rates also have the potential to create a wider risk profile for investors to start looking at stressed and distressed opportunities. Until recently, the UK has proved a less attractive buyer’s market – whereby multiples of return on solvent exits have dropped. As a result, we have also seen more private equity and venture capital-backed businesses facing challenges and investors taper their appetite in series B and C funding rounds, which in turn has created further cashflow issues. 

Specifically, we have seen this culminate in more restructuring activity in the alternative network, tech (start-up and scale-up), and craft brewing markets. Indeed, recent months have seen an increase in prudent boards winding-down operations and solvently liquidating companies.

With all of these factors in mind, it will be interesting to see how Q4 unfolds. While we find ourselves in more optimistic times than of late, the true impact of the recent state of ‘permacrisis’ remains to be seen.