Four fifths of UK restructuring bankers, lenders and adviser see no real economic recovery in 2013 and 45% expect an increase in the level of defaults compared to 2012, according to a survey by business and financial advisers Grant Thornton UK.
The survey highlights defaults are likely to be sector specific, with 84% of respondents rating retail as having the lowest resilience of any sector in 2013. This finding has been reinforced by recent bad news about the likes of Blockbusters, Jessops and HMV. The hotels, pubs and leisure sector is rated second least resilient while, more positively, sectors including food and drink and energy are considered more resilient.
On a positive note for underperforming businesses, bank forbearance levels are anticipated by over 60% of respondents to stay at the same comparatively high levels as in 2013. Government influence over nationalised banks, and the on-going review of the sale of interest rate products, were cited as important factors influencing forbearance this year, as was the impact of public opinion, researchers found.
“2013 will be marked by muted consumer confidence and tough trading conditions for companies without a compelling proposition. Corporates with strong balance sheets, good brands and products will build market share. For those that need to put their house in order, 2013 may offer a final breathing space. So, I’d say now is the time to get ready for future refinancings. If you fail to change in 2013 you will find refinancing in 2014 increasingly challenging,” said Shaun O’Callaghan, UK head of restructuring, Grant Thornton.
The research revealed cost cutting continues to be the favoured restructuring tool while more fundamental restructuring options are often overlooked. It also showed enforcement action is the last resort exit for lenders and is only employed in the minority of cases. Those surveyed do not expect much change to the strategies employed to deal with underperforming loans, but a significant minority expect divestments of underperforming loan books to third parties, and exits through the market sale of debt will increase, by 35% and 32% respectively. Secondary loan sales to US funds are viewed as a key area of activity in 2013, not just in the UK but throughout Europe.
“Whilst enforcement levels may well stay the same in 2013, we are likely to see banks put debt and assets to market to reduce their exposure and working capital lending. We may also see more willingness to enforce by new stakeholders that have previously purchased loan portfolios or debt at a discount,” said David Dunckley, partner, head of mid market restructuring.