There are always more failures of businesses and foreclosures of all descriptions – and thereby distressed loan positions – as an economy comes out of a recession, says Duncan Swift.
It’s a particularly important point to make after the Bank of England upgraded its forecasts in May: it said then that it expects UK GDP to rise by 7.2% in 2021, after a 9.8% contraction in 2020.
Swift, a restructuring and insolvency partner at accountant and business advisory group Azets, and who has more than 30 years’ experience, explains: “As we come out of recession, businesses are faced with the double whammy of repaying historic debt – and we know that they built up historically high levels of liabilities during the course of the pandemic, whether provided by government or by landlords or from other sources.
“And they’re also seeking to gear up their working capital to meet increased demand. They need working capital to prime the pump.“That combination of overtrading on working capital positions plus repayment of historic liabilities – that is what is going to cause the greatest amount of financial distress over the course of the next 12 to 36 months.”
That’s when businesses will fail. Loans will get foreclosed or business will simply “fall over” and have to go into a formal insolvency procedure.
Swift, who was taking part in a podcast discussion about how the UK market deals with distress, also highlights how uneven the impact of the pandemic has been. Across retail and leisure, there have inevitably been very deep pockets of acute distress. “It’s only in these pockets where social interaction is essential that we are seeing real need for insolvency procedures and protections to safeguard businesses and possibly to transact them,” Swift says.
Evaluating the market
But if you look at the rest of the UK SME marketplace, the distress has been alleviated. Government support mechanisms have effectively reduced corporate insolvency volumes by over 30% throughout the pandemic.
Tim Perkin, senior director and head of recovery at CBRE, says the current situation is also being shaped by the fact that lenders are generally still in “forbearance mode”.
“I think lenders have been very supportive and provided time for borrowers, particularly where the borrowers are communicative and making efforts to work with their lenders to resolve those problems,” says Perkin, who is also a fixed-charge receiver. “So I think there’s a question of when we’re going to see greater volumes come through, because at the moment there is generally that support.”
However, there are plenty of discussions going on behind the scenes.
“There are a lot of questions from all types of lenders,” Perkin says. “They’re keen to see what activity there is in the market. And they’re trying to second guess where there is limited activity and whether there is any first mover advantage in trying to act on an asset quickly. Or do you need to see some activity in a market before you want to bring your assets out? So there’s a lot of questions being asked and lots of discussions and careful thought being given by all types of lenders about the way forward,” Perkin says.
Ollie Childs, head of commercial auctions at BidX1, says some lenders are also now getting themselves prepared to bring distressed assets to market by speaking with agents and auctioneers. “We’re seeing more discussions than we’ve had for a long time with lenders. They’re working very intelligently and actually really trying to read the market and jostle for that position,” he says.
“What I’ve noticed over the years is that when we’re instructed by an insolvency practitioner or a receiver, the instruction runs with them. It may be a personal appointment. And we don’t really have discussions with the lenders in the background. But certainly since the end of last year, we’re finding that lenders do want to speak with the agent. They do want to speak with the auctioneer. That may be because they are slightly newer lenders who haven’t seen this position before. So there’s an element of them wanting to understand the market more closely.”
A tailored approach
Meanwhile, the auction market is looking robust, fuelled by the private investor. There is debt available in the market and there are a lot of private investors who are entrepreneurial and are sitting on a lot of cash.
BidX1 has been looking to capitalise further on this demand by offering vendors bespoke online auctions, focused on larger and more complex individual assets. Over the past six to nine months, it has sold a number of retail assets in this way with lot sizes up to almost £8bn.
“These are assets which have been in either insolvency or receivership positions. They are not only at a price point which is typically higher than you would traditionally see at auction, but they are also a lot more complicated,” Childs says.
Rather than a more typical auction lot of £500,000 with a legal pack of 10 documents, these sales might involve an asset with a £4m guide price and a legal pack of 600 documents. “That’s a lot of due diligence the buyer and their solicitors would need to undertake, and they’ll need a period of time to do that. But what we’ve seen is that the private investor is very resourceful. They have always been like that, but they’ve now got access to a product type that they couldn’t have perhaps purchased 10 years earlier.”
Indeed, some of the shopping centres to have traded through auction recently were purchased for upwards of £30m 10 years ago, and the price point now is perhaps closer to £5m. “These buyers are resourceful. And I think we’re in a market at the moment where if you try and sell these assets by the private treaty route, you do give buyers time to prevaricate,” says Childs.
With the auction process evolving rapidly to offer flexible online sales, both Perkin and Swift say it is suited to a much greater variety of assets than previously.
However, Perkin makes the point that on the more complex assets – and particularly the larger ones – an institutional buyer may still be unwilling to do a lot of that due diligence ahead of bidding and would therefore prefer a private treaty process.
This podcast and article were produced before the extension of the ban on commercial evictions to 2022.
To send feedback, e-mail julia.cahill@eg.co.uk or tweet @EGJuliaC or @EGPropertyNews
