By Chris Hawes, Asset-based lending leader and director, PwC
The challenges facing businesses as they stage a rebound from the pandemic are well documented. Businesses around the globe are now having to navigate an asymmetrical recovery while forging ahead on the path to future growth—a difficult balancing act.
As the focus shifts to recovery and growth, alongside technological advances gathering pace, the central challenge for businesses is reinforcing their balance sheets in the medium-to-long term while addressing the pressing issue of short-term survival.
If this isn’t stating the glaringly obvious, levels of lender support and expertise will be key to supporting businesses driving long-term value in these evolving market conditions. Refinancing and new-borrowing lines will be even more crucial platforms post-pandemic than they were during it.
Setting the context
During the most acute phase of the pandemic, many businesses were forced into survival mode, with revenues drying up and liquidity under pressure. The lifeline of government relief—collectively running into trillions of dollars, credit moratoria and huge capital availability at low interest rates helped many companies weather the crisis. As government-support measures come to an end and temporary loans come due for repayment, the brakes on restructuring activity will undoubtedly begin to come off, presenting key opportunities and risks for the lender community to address.
At PwC, we’re already seeing first-hand how businesses and private-equity players are increasingly looking to asset-based lending facilities as an alternative to traditional cash flows and leveraged facilities. This trend is set to continue as the market recovers from the pandemic. Activity could be particularly high in the aerospace, automotive, manufacturing, construction and plant hire sectors.
Corporates have found the flexibility offered by asset-based lending (ABL) particularly attractive as they are looking to fund top-line growth. This is reflected in the hard numbers: Our team has worked on ABL financing processes totalling close to £1 billion in the last two years. We attribute this increased demand to borrowers optimising their financing strategies and navigating an increasingly diverse lender landscape. This includes more than 100 active debt funds and a significant number of independent ABL lenders and challenger banks in addition to traditional commercial lenders, reflecting the broader supply to service the uptick in customer needs.
As we move forward, what does the future hold, and where will the lender community be needed most?
Clarity
Clients across the international banking sector are trying to navigate an increasingly complex range of products and market lenders to ensure they secure optimum outcomes. Providing the clarity needed to cut through to the customer considering such an array of options will be key.
A global view
A recent in-depth PwC study of 46 countries across the globe pinpointed some interesting trends and related implications for businesses and lenders. Government relief and credit moratoria, support from banks and other lenders, and significant availability of capital at low interest rates (mentioned before) have played a dual role: allowing businesses to weather the crisis but also buffering them from insolvency and more acute restructuring activity throughout the pandemic.
While the impact of the COVID-19 pandemic is receding, the coming year presents a fresh set of challenges as businesses deal with the withdrawal of government supports and the shift from “stabilise and survive” mode to longer-term recovery and growth.
Fortunately, the combination of state supports and readily available capital has made amend-and-extend and refinancing the clear and preferred solutions in many situations to date. However, the abundance of capital and pressure to put it to work mean that many refinancing agreements to date have been covenant-lite.
The key question is: Are these businesses truly ready for the criteria becoming more stringent, or does prudent contingency planning need to be accelerated before the situation becomes stressed?
The boost provided by vaccine roll-outs, catalysing the lifting of restrictions and improvements in consumer and business confidence within many economies, is of undeniable value. But opening up comes with the scaling back of government support and the need for businesses to tackle the debt burdens accumulated during the pandemic.
Further challenges include the requirement to ramp up output in the face of continued strains on liquidity, rising raw-material prices and mounting supply-chain disruptions. In turn, progress on vaccination varies, leaving countries with low immunisation rates vulnerable to fresh surges in infection and resulting lockdowns.
In that context, as they drive contingency planning to avoid problems further down the line, companies are telling us that they are acutely aware that availability of finance will also be increasingly linked to additional factors, including strategy and performance on ESG (environmental, social and governance) criteria, diversity and inclusion.
To date, where there has been insolvency or more comprehensive restructuring activity, it has tended to be either sector- (for example, those most affected by the pandemic, such as retail, hospitality and travel, or ESG-related, such as mining and energy) or situation- (such as fraud or businesses suffering from volatile commodity-price and supply-chain issues) specific.
Looking forward, clients tell us they are seeking to maintain, or ramp up, activity in four key areas:
- Realigning operations,
- Bolstering liquidity and working capital,
- Stepping up progress on corporate deleveraging,
- Streamlining and optimising their business portfolios.
This all comes at a cost
Consequently, any overleveraged capital structures will need to be addressed. And efforts to maintain lender forbearance and support will be particularly important, particularly in sectors in which the prospects for recovery and long-term growth are less clear.
Some countries, such as Malaysia and Greece, are expecting an offloading of nonperforming loans by banks to special-situation funds, which in turn may drive a more aggressive approach to recovery. In addition, some markets, such as New Zealand, are seeing an influx of nonbank lenders for the first time.
Further risks include high levels of fiscal debt after many governments borrowed money to help support businesses during the crisis. This debt burden means that the scope for further state aid in the event of fresh surges in infection could be limited. The risk is especially marked in countries where government debt was already high going into the crisis. This includes a number of major economies, such as France and Japan.
Regional businesses
Some economies are already seeing a resulting uptick in restructuring activity, particularly in privately owned, town-based companies at the heart of regional economies. Activity could accelerate even faster in less-developed markets with less resilience, and low COVID-19 immunisation rates could hamper economic recovery. However, in most markets, there will be a lag, although we would expect to see a step-up through the course of 2022.
At the other end of the spectrum, exceptionally rapid recovery and plentiful capital for refinancing may prevent any significant surge in worst-case-scenario insolvencies and shift the dial towards solvent solutions—with lenders at the forefront of tackling these key issues.
Sector focus: Who will need to be supported the most?
The extent of government relief has varied. Some countries, such as Mexico, have held back on government stimulus amid continuing austerity. Others may have wanted to inject more support but were constrained by elevated sovereign-debt levels going into the crisis. In turn, even with government relief, businesses in many economies, including Turkey and Hong Kong, have seen high levels of distress during the pandemic.
Businesses at the centre of the restructuring radar include those in sectors most severely affected by lockdowns and travel restrictions, including tourism, airlines, hospitality and bricks-and-mortar retail. Other focus areas include sectors already feeling the impacts of the move to net-zero emissions, such as mining and energy, as well as those experiencing growth pains as we emerge from the pandemic (spikes in demand, supply-chain issues, labour shortages, commodity-price volatility and inflation).
Outlook
As 2022 unfolds, companies will need to re-appraise and shore up their liquidity and working-capital requirements to address the unwinding of government supports and debts accrued during the pandemic while at the same time meeting renewed customer demand and delivering delayed investment.
The limited availability of further government support in most economies will increase reliance on existing lenders, shareholders and capital markets—which may be less forthcoming in some sectors, where the prospects for recovery and long-term growth are less clear.
For clients, advisers and lenders, this is a key opportunity to work together and identify solutions to emerging problems before they turn into insurmountable issues. 2022 is set to be quite a year!
Access PwC’s “Global Restructuring Trends Report” at: https://www.pwc.co.uk/services/business-restructuring/insights/restructuring-trends/global-restructuring-trends-2021.html