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Restructuring review Q1 2021: what does the future hold?

Shaun O'Callaghan Shaun O'Callaghan

Restructuring and insolvency data for Q1 of 2021 shows a continuing low level of formal insolvencies and concerns about future trading post-lockdown in particular sectors. Shaun O'Callaghan looks at what the rest of 2021 might look like.

Formal UK insolvency appointments remain at a low, but we are seeing a busy corporate finance environment and transactions in the mid-market were very strong in the first quarter. Restructuring advisory projects continued at 2020 levels, particularly lender-led, with a leaning towards real estate, travel, tourism, hotels and leisure.

As expected, we are seeing the impact from the extension of government support, and the general prohibition on creditors petitioning for the winding up of companies until, at least, 30 June 2021. This continues to act as something of a life-line for businesses that may otherwise have fallen into the distressed category.

My feeling is that this will continue for the foreseeable future and mid-market insolvency appointments are not expected to start increasing substantially until Q4 (or perhaps H1 2022), at the earliest.

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Specific sector-related concerns around future trading, and the potential for restructuring and insolvencies, are coming to the fore in consumer, automotive and energy.

Market insights

It will not come as any surprise that the largest insolvencies in Q1 were in sectors most severely impacted by the pandemic and lockdown. Table 1 shows insolvencies (including both new insolvencies as well as insolvencies following other procedures) across retail, travel, automotive and manufacturing, as well as financial services.

Largest insolvencies in FY21 Q1 by Turnover

£'000 Company Turnover th GBP Last avail. yr
1 DEBENHAMS PLC 2,277,000
2 BALLI GROUP/BALLI STEEL PLC 2,172,608
3 HARMAN AUTOMOTIVE UK LIMITED 809,039
4 FLYBE GROUP LIMITED 752,600
5 C. & J. CLARK INTERNATIONAL LIMITED 725,300
6 PROMETHEON ENTERPRISE LIMITED 454,287
7 WHEEL BIDCO LIMITED 430,824
8 EXTRA ENERGY SUPPLY LIMITED 358,950
9 CANAVERAL HOLDCO LIMITED 329,277
10 GREENSILL CAPITAL (UK) LIMITED 316,260
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Restructuring review: Q4 2020 Find out more

Consumer

As part of our consumer markets focus, we recently undertook some detailed analysis of the Office for National Statistics (ONS) retail sales data, and the results indicate some interesting trends:

Reflections on 2020: retail sales actually grew

The last year was undoubtedly a challenging year for many in the consumer markets sector, with non-essential retail, in particular, badly affected. However, some retailers did benefit, seeing sales growth, and there were some fundamental shifts in consumer behaviour, which will shape the UK retail sector's recovery in 2021 and beyond.

Annual retail sales 2017 – 2020

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Note: Total retail sales (excluding fuel). Source: ONS, Grant Thornton UK LLP analysis.

Our analysis shows that retail sales grew by 2.3% in 2020 (as shown in chart 1). The drivers of this growth were food sales and a step-change in the shift towards online shopping. Online penetration grew from 20% before the March 2020 lockdown to around 35% by March 2021. This reflects an acceleration of a decade-long trend.

Food store sales grew by 7.1% in 2020, as consumers were limited to shopping at essential goods retailers (mainly grocers and supermarkets). What is particularly striking is the growth in online food sales from around 5% before March 2020 to around 12% by March 2021.

While some consumers might have needed to shop for food online due to isolation, shielding and lockdown requirements, it's interesting to note how online food sales have grown over the past 12 months. This indicates how consumers have become more comfortable with purchasing their groceries online and gaining trust in this method of food shopping.

Who benefitted most from the growth in online sales?

Online sales – Multi-channel vs. Pure players

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Source: ONS, Grant Thornton UK LLP analysis.

Our analysis of the growth in online retail sales noted that, as one would expect, pure players benefitted with a year-on-year growth in sales of 36% in 2020 (as shown in chart 2). However, it's interesting to note that their share of total online sales fell from 52.8% in 2019 to 48.1% in 2020.

Traditional retailers who invested in their online offering, established reliable logistics and fulfilment capability, and gained the trust of their customer base, now have a bigger share of online sales with c. 52% of total online sales. These multi-channel retailers enjoyed online sales growth at an astonishing 64% year-on-year in 2020.

Successful multi-channel retailers, such as Next and Currys PC World, benefitted from already having well-organised online platforms. Other traditional retailers were left playing catch-up.

Small, local businesses that adapted to selling online also benefitted from access to a wider online customer base. Online transactional websites are now cheap and easy to set up, and retailers can use marketplaces such as eBay and Amazon.

While we think that online penetration is likely to fall slightly in the short term, with further easing of lockdown restrictions, we expect it to level off as part of the post-lockdown normalisation of consumer behaviour.

The customer buying journey will undoubtedly require traditional retailers to continue to provide a strong online channel offering. We also believe that physical stores will remain relevant, but uninspiring and underinvested stores will prove a turn-off for consumers.

Automotive and industrial

The automotive and industrial sector has held up well from an insolvency perspective over the first quarter, with limited failures. This is due to a combination of continuing government and original equipment manufacturer (OEM) support, and a continued bounce back in both production levels and consumer demand.

Dealerships

Dealers fared much better in the lockdown months from January through March, compared to the same period of last year. While the plate-change month's sales were 38% behind March 2019, they were 10.5% ahead of March 2020, despite showrooms being closed other than 'click and collect' offerings.

With the massive rise in online consumer spending increasing home deliveries, the light commercial vehicles market has performed better than new car registrations, with sales 43.4% ahead of Q1 2020.

We are aware that most commercial vehicles brands are seeing a shortage of vehicles and, with demand relatively high versus supply, this in turn, means that used vehicle prices are on the rise.

Heavy commercial vehicle sales have declined by 31.1% in the first quarter compared to 2020, due to weak business confidence and the reluctance for businesses to invest in new assets.

Supply chain businesses

The chart below shows the continued move from diesel and petrol cars towards electric and hybrid vehicles. This is driven by changing consumer preferences towards greener energy options and government legislation banning internal combustion engine-only (ICE) vehicles by 2030, and hybrid vehicles by 2035.

Suppliers of the circa-30% of parts used only in ICE vehicles will need to be refocusing business models now. This is particularly the case given many manufacturers are determined to convert to the production of electric vehicles years ahead of government deadlines.

Continued move from diesel and petrol cars towards electric and hybrid electric vehicles

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Vehicle production has been and continues to be affected by disruptions caused by the global shortage of semiconductors. A shortage of rubber is also expected to cause delays in the coming months.

We have also seen a number of overseas suppliers reduce or indicate they intend to limit UK operations, as certain OEMs have ceased UK operations.

Future outlook

Our automotive advisory team prepares estimates of future new car sales. Currently, these are in the range of between 1.66 million and 2.05 million registrations for FY21. Compared to 2019, this would be between 28.2% and 11.3% lower, respectively.

We are not expecting a significant uptick in insolvency cases in Q2, but fallout is likely inevitable towards the end of the year. Wider market challenges such as the semiconductor and rubber shortages will collide with the closing of the furlough scheme in September, and payments falling due of HM Revenue and Custom's debts and government-backed loans.

Hotels

We expect UK hotels to benefit from significant pent-up demand for holidays and weddings once lockdown measures are eased and vulnerable groups have been vaccinated.

Domestic corporate and meetings, incentives, conferences and exhibitions (MICE) demand should begin to recover in H2 2021. Recovery is likely to be significantly slower for hotels in key gateway cities that are heavily dependent on international travellers.

Managing liquidity will remain a key challenge for operators over the coming months, particularly while social distancing restrictions remain in place and government support schemes begin to taper off. This is particularly relevant for hotels that were underperforming or under-invested pre-COVID-19.

We expect lenders to remain largely supportive to the end of Q3 2021, but as the various government support schemes start to unwind and deferred payments become due, we are likely to see an increase in stress in the sector.

The summer months could see record hotel occupancy levels in some parts of the UK. However, 2021 is still likely to be a challenging year for the sector. Still, the recovery will offer resilient and innovative management teams an opportunity to reset and revive their hotels, and take advantage of the new landscape.

Energy

The oil and gas sector has been handed a bit of a reprieve, particularly given the rise in the oil price to somewhere in the range of USD 60 to USD 70 per barrel.

During our oil and gas roundtables, one of the key messages was that the reduction in profit due to the events of this year was not as severe as initially anticipated. Nevertheless, there remain concerns in some areas of the market as to whether or not this is a sustainable reprieve. Some say they are acutely aware that the impact of capex cuts may still be felt.

We continue to hold an expectation of future consolidation in oilfield services. There are too many businesses within certain areas of the supply chain without enough work to ensure the survival of all.

Energy transition remains a strong focus for most across the energy sector. Some in oil and gas are turning their attention to renewable opportunities as UK and Scottish governments are pushing the clean energy agenda harder than ever. The most recent announcement being the £16 billion North Sea Transition Deal.

Care homes

Care home profitability has been on a downward trajectory for the last decade. The pandemic has not only impacted the operators who were already struggling, but introduced extra challenges to those who thought they had a healthy operating model. Occupancy has declined by 10% compared to pre-pandemic levels and there is evidence people are choosing, where possible, to keep their loved ones out of care home settings, and working from home has enabled families to offer this flexibility.

There does not appear to be significant pent-up demand for care home places and occupancy is unlikely to recover to pre-pandemic levels in the next 18 months. This is a function of the damaged reputation of the sector where families are preferring other options, and the sad loss of a number of people who have died during the pandemic who would otherwise perhaps of resided in a care home. The various HM Government support packages (not least the Infection Control Fund) have provided a much-needed financial buffer, although it is not clear how care homes will fare once the various incentives cease in the summer.

Financial services

The true impact of recent events on the financial services (FS) sector hasn't yet been felt, which could make for a tense start to the second half of the year.

Large lenders are facing capital constraints, affecting FS borrowers and the growth of various sub-sectors. As a result, we are seeing an increase in client interest and closer consideration of wind down planning and related scenarios. 

The FS market has experienced a further increase in regulation, especially in sectors offering high-cost short-term and buy now, pay later facilities. There is currently a cry for cash and we are seeing an increase in working capital solutions.

It is also interesting to consider what the consequences will be to small and medium enterprise (SME) lending, both from a lender and borrower perspective, when the furlough scheme ends.

FY21 Q1 graphical analysis

Insolvencies by region

The regional spread of insolvencies across the UK is shown in the graph below.

As is usual, Greater London had the largest number of insolvencies (2685), which is up from Q1 and Q4 FY2020, with Wales (122) and Northern Ireland (95) at the lower end. This is, again, consistent with previous quarters in FY20.

As mentioned previously in this article, we expect these numbers to increase as government support is withdrawn and we progress from a liquidity crisis to an insolvency crisis, as the underlying impact on businesses is fully realised.

FY21 Q1 Insolvency by geographic location

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Insolvency by geographic location comparison

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Insolvencies by sector

As we look at the insolvencies by sector, the highest rate was in the professional, scientific and technical sector (1,886), which is up from 1419 in Q4 FY2020.

As mentioned above, we are still seeing an uptick in activity across those sectors that have been hit hardest by lockdown measures. We expect stress in travel, tourism, hotels and leisure to continue.

FY21 Q1 Insolvency by SIC code

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Insolvency by SIC code comparison

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