By Chris HawesHead and Director of Asset-Based Lending, PwC
Jhe challenges facing businesses as they rebound from the pandemic are well documented. Businesses around the world must now navigate an asymmetric recovery while continuing on a path of future growth – a difficult balancing act.
With the focus on recovery and growth, alongside accelerating technological progress, the main challenge for companies is to strengthen their balance sheets over the medium to long term while tackling the pressing issue of short term survival.
While that doesn’t state the glaring obvious, levels of lender support and expertise will be key to sustaining businesses that drive long-term value in these changing market conditions. Refinancing and new lines of borrowing will be even more crucial platforms after the pandemic than they were during it.
Set the context
During the most acute phase of the pandemic, many businesses were forced into survival mode, with declining revenues and cash under pressure. The lifeline of government assistance – collectively amounting to trillions of dollars, credit moratoriums and the huge availability of capital at low interest rates helped many businesses weather the crisis. As government support measures come to an end and temporary loans mature, the brakes on restructuring activity will undoubtedly begin to lift, presenting key opportunities and risks for the lending community.
At PwC, we are already seeing firsthand how companies and private equity players are increasingly turning to asset-based lending facilities as an alternative to traditional cash flow and leveraged facilities. This trend is expected to continue as the market recovers from the pandemic. Activity could be particularly high in the aerospace, automotive, manufacturing, construction and plant leasing sectors.
Businesses have found the flexibility offered by asset-based lending (ABL) particularly attractive as they seek to fund revenue growth. This is reflected in the hard numbers: our team has worked on ABL funding processes totaling nearly £1bn over the past two years. We attribute this increased demand to borrowers optimizing their funding strategies and navigating an increasingly diverse lender landscape. This includes over 100 active debt funds and a significant number of independent ABL lenders and challenger banks in addition to traditional commercial lenders, reflecting the wider offering to meet rising client needs.
As we move forward, what does the future hold and where will the lending community be most needed?
International banking clients are trying to navigate an increasingly complex array of market products and lenders to ensure they are getting the best results. It will be essential to provide the clarity necessary to convince the client of such a range of options.
A global vision
A recent in-depth study by PwC of 46 countries around the world highlighted some interesting trends and related implications for businesses and lenders. Government relief and credit moratoriums, support from banks and other lenders, and ample availability of capital at low interest rates (mentioned earlier) played a dual role: enabling businesses to weather the crisis , but also protect them from insolvency and more acute restructuring activity throughout the crisis. the pandemic.
As the impact of the COVID-19 pandemic wanes, the year ahead presents a new set of challenges as businesses grapple with the withdrawal of government aid and the shift from “stabilize and survive” mode to a recovery and longer-term growth.
Fortunately, the combination of state support and readily available capital has made modification and extension and refinancing the clear and preferred solutions in many situations to date. However, the abundance of capital and the pressure to make it work means that to date many refinancing agreements have been alliance-lite.
The key question is: are these companies really ready for the criteria to become stricter, or should careful contingency planning be accelerated before the situation becomes tense?
The momentum provided by vaccine deployments, catalyzing the lifting of restrictions and improving consumer and business confidence in many economies, is undeniably valuable. But with the opening comes the reduction of government support and the need for businesses to tackle the burden of debt accumulated during the pandemic.
Other challenges include the need to increase production in the face of continued tight liquidity, rising commodity prices and growing supply chain disruptions. In turn, immunization progress varies, leaving countries with low immunization rates vulnerable to further outbreaks of infection and resulting lockdowns.
In this context, as they direct contingency planning to avoid problems later, companies tell us they are acutely aware that the availability of finance will also increasingly be linked to additional factors, including the strategy and performance in terms of ESG (environmental, social and governance), diversity and inclusion.
To date, where there has been insolvency or more comprehensive restructuring activity, it has tended to be either sector-specific (e.g. those most affected by the pandemic, such as retail, hospitality and travel, either related to ESG, such as mining and energy) or a specific situation (such as fraud or companies suffering from commodity price volatility and supply chain issues) .
Looking forward to, customers tell us they are looking to maintain or grow their business in four key areas:
- realignment of operations,
- Strengthen liquidity and working capital,
- Accelerating progress on corporate deleveraging,
- Rationalization and optimization of their business portfolios.
This all has a cost
Therefore, any over-leveraged capital structure will need to be considered. And efforts to maintain forbearance and support from lenders will be particularly important, especially in sectors where prospects for recovery and long-term growth are less clear.
Some countries, such as Malaysia and Greece, expect an offloading of non-performing loans by banks to special situation funds, which could in turn lead to a more aggressive approach to the recovery. In addition, some markets, such as New Zealand, are seeing an influx of non-bank lenders for the first time.
Other risks include high levels of fiscal debt after many governments borrowed money to help support businesses through the crisis. This debt burden means that the possibilities for additional state aid in the event of further outbreaks of infection could be limited. The risk is particularly marked in countries where public debt was already high at the start of the crisis. This includes a number of large economies, such as France and Japan.
Some economies are already seeing an increase in restructuring activity, particularly in private companies located in cities at the heart of regional economies. Activity could accelerate even faster in less developed and less resilient markets, and low COVID-19 vaccination rates could hamper economic recovery. However, in most markets there will be a lag, although we expect to see an acceleration during 2022.
At the other end of the spectrum, an exceptionally fast recovery and abundant capital for refinancing can prevent any significant increase in worst-case insolvencies and shift the dial towards solvent solutions, with lenders in the front line to address these key issues.
Sector focus: who will need the most support?
The extent of government assistance has varied. Some countries, such as Mexico, have withheld government stimulus measures amid continued austerity. Others may have wanted to inject more support, but were constrained by high levels of sovereign debt early in the crisis. In turn, even with government assistance, businesses in many economies, including Turkey and Hong Kong, have experienced high levels of distress during the pandemic.
Companies at the center of the restructuring radar include those in sectors hardest hit by shutdowns and travel restrictions, including tourism, airlines, hospitality and brick-and-mortar retail. Other areas of focus include sectors already feeling the effects of the shift to net-zero emissions, such as mining and energy, as well as those facing growth challenges as we emerge from the pandemic (peaks demand, supply chain issues, labor shortages, commodity price volatility and inflation).
As 2022 unfolds, businesses will need to reassess and bolster their cash and working capital needs to address the unwinding of government supports and debt accumulated during the pandemic while meeting renewed customer demand and realizing growth. delayed investments.
The limited availability of additional government support in most economies will increase dependence on existing lenders, shareholders and capital markets, which may be less open in some sectors, where prospects for recovery and long-term growth are less clear.
For clients, advisors and lenders, this is a key opportunity to work together and identify solutions to emerging issues before they turn into insurmountable problems. 2022 is shaping up to be one hell of 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