What’s Ahead for UK Businesses in 2022? Restructuring

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What’s ahead for UK businesses in 2022?

This article, written by Chris Coley and Kris Carpen in our UK Restructuring Advisory team, first appeared in Credit Strategy.

The UK’s growth rate has been stronger than expected in the post-Covid recovery phase. The UK economy, which contracted almost 10% last year, is set to grow 6.5% in 2021, according to a forecast from the independent Office for Budget Responsibility. That compares with a previous prediction of 4% and represents the biggest upgrade since the 1980s. When this crisis began 20 months ago, no one imagined the full extent of the disruption which UK business would face over the next two years, starting with the COVID-19-induced recession, and compounded by Brexit-related supply chain problems and the recent cost of living/energy crises.

Those businesses that have survived have not had it easy. The OECD predicted insolvencies to rise by 37% in the United Kingdom as a direct result of the pandemic. As the various government support schemes are wound down, businesses are facing new challenges and expectations.

New pressures have emerged as the world of work has been transformed. Disruption stalks almost every sector, and businesses are still trying to figure out how to make hybrid working work, what to do with their real estate portfolios and what will be expected of them in pursuit of ESG targets.

Sector-specific support in the form of the business rate cuts announced in the Chancellor’s Autumn Budget will provide a boost for businesses in the hospitality, leisure and retail sectors for the next 12 months, but with increases to corporation tax, the national minimum wage and national insurance contributions on the horizon, businesses can see rising costs ahead of them in every direction in which they turn.

Finding the Right Support

We have been in worse situations and that’s worth remembering. Many will remember the economic crash of 2008, when approximately 280 businesses were forced to close a week; this time, the situation is very different. Measures put in place since 2009 have supported a healthier lending sector, and government support measures have put businesses in a much stronger place now than those emerging from the recession 12 years ago.

The new permanent measures introduced under the Corporate and Insolvency Governance Act 2020 (CIGA) will have long-term implications on UK restructurings and represent a fundamental shift in the approach to restructuring in Europe. One of the most important new tools to the UK restructuring framework under this change is the ‘Restructuring Plan’. This will be influential in supporting businesses who may face distress in coming months. The CIGA introduced a new mechanism for an ‘arrangement’ or ‘compromise’ between a company and its creditors and/or shareholders to eliminate, reduce, prevent or mitigate the effects of any of the company's financial difficulties. One of the key differences of the Restructuring Plan compared to previous tools is that dissenting creditors can be “crammed down”.

In addition to the Restructuring Plan, Time To Pay (TTP) and Company Voluntary Arrangements (CVAs) allow businesses to set up structured repayment plans to HMRC or creditors, respectively, and continue trading in the meantime.

There are also more opportunities for businesses to use these tools as lenders are more willing to entertain solutions to write off debt. With interest rates still at historic lows (albeit predicted by some to rise in the coming weeks and months), lenders have a healthy appetite to lend and, importantly, they understand the long-term benefits of helping businesses stay afloat and thus realize their potential to become lucrative future clients.

These schemes can be an essential tool for businesses struggling to keep up with payments. Entrenched in law, the Restructuring Plan and planned payment arrangements provide clarity to company directors and funders alike, offering a structured road to solvency. Bringing in expert third parties to assist can make the process smoother as they have the experience and the qualifications to progress plans through the courts and the connections to get the best agreement.

Time Is of the Essence

Even companies that have been relatively stable over the past 18 months may find themselves struggling in the new trading environment. It’s vital that potential issues are identified and plans are made early to give businesses their best chance of success. The greatest asset for any business looking to restructure their finances is time.

Directors should already be evaluating how their Target Operating Model (TOM) has been affected by COVID-19, assessing the liquidity of the business, and if required, looking for opportunities to right size overleveraged balance sheets.

Businesses that have survived the crisis have made huge progress, but it’s important to be aware that businesses can struggle in the recovery phase and in the downturn. By evaluating the outlook for the next year, assessing balance sheets early and having a plan in place, businesses can plan for a productive and profitable 2022 and beyond.

What’s Ahead for UK Businesses in 2022? 2021-12-08T00:00:00.0000000 /en-ca/insights/publications/restructuring-advisory/whats-ahead-for-uk-businesses-in-2022 /-/media/kroll/images/publications/featured-images/whats-ahead-for-uk-businesses-in-2022.jpg publication {B21C445D-32EF-4580-A893-BB3D5B8243AC}

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