article banner

Q2 restructuring review

Shaun O’Callaghan Shaun O’Callaghan

Q2 restructuring activity has largely mirrored Q1, with companies having sufficient liquidity to weather the difficult trading conditions. We’re not anticipating much change to this in Q3, albeit we see the following as some of the key challenges businesses face:

Debt burden

Data published by the Bank of England (BoE) suggests that there was a large increase (around 25%) in debt taken on by small and medium-sized enterprises (SME) over the last 18 months. While not an immediate problem due to soft payment terms and low interest rates, we suspect this will cause issues in future serviceability and refinancing in the medium term.

Fortunately for those heavily debt burdened businesses, the BoE continues to signal there are no imminent interest rate rises, despite increasing inflation figures domestically and internationally. However, it should be noted that there is a divergence of views developing in the BoE monetary policy committee about how long its soft monetary policy should continue.

Supply chain issues

Global food prices are at their highest in seven years, shipping costs have risen threefold since 2019, and commodity prices are climbing. Goods cost more and are often delayed. This is going to make it increasingly challenging to manage businesses profitably. High-quality data and forecasting will be critical for businesses to dynamically adapt to the rapidly changing market.

Restructuring credentials Discover how our team can support you

Restructuring review Q1 2021: what does the future hold?

Find out what we had to say in Q1

Changes in consumer behaviour

Spending patterns, travel preferences and eating habits are just a few of the areas that have changed markedly over the last 18 months. Having the right level of stock and the optimum number of staff has never been more difficult to predict.

As we know too well, overstocking and overstaffing leads to vast inefficiencies and can be extremely costly, whereas insufficient levels of each can lead to lost revenue or customers, sometimes permanently.


Financial services restructuring

The general uptick in restructuring activity in the Financial Services (FS) sector is primarily driven by increased regulatory oversight for consumer-related lending. Trends are emerging in rising debt levels skewed to funding the survival of businesses, working capital challenges and in the impact on lending.

Other challenges facing FS businesses, currently, are a lack of financial resilience, high operating-cost bases, increased compliance, a heightened focus on senior managers regime, platforms and systems. In addition, COVID-19 is driving heightened demand, deferrals, forbearance measures and customer delinquency.

In respect of private equity interest in this sector, there's an increase in investment across certain sub-sectors, which will be interesting to see unfold over the coming months.

In the peer-to-peer market there is some shift in business models, primarily businesses moving away from the current retail investment model to seek further market share. Subject to eligibility, businesses in this market are also attempting to leverage government-accredited scheme lending.

Payment and E-money institutions continue to be an area of interest for a variety of different classes of investors with businesses continuing to be able to secure new equity funding. However, the often high cost base of these platforms combined with asset-light balance sheets creates vulnerabilities in the event that revenue targets fail to meet expectations, and the ability to wind them down in an orderly manner can be constrained as a result. Further, complications can arise due to the specific regulatory back-drop and the need to consider appropriate protections for client monies and customer deposits. The new Special Administration Regime for Payment Institutions and Electronic Money Institutions came in to force during the quarter with the principal aim of ensuring funds are returned to customers quickly and whilst still untested we would see this as a positive development.

The insurance space appears fairly stable in the UK market and M&A activity is strong in the intermediaries sub-sector, ie, brokers and agents. We’re increasingly involved in the emerging premium financing trend alongside our focus on the insurance run-off market due to the demand in this space.

As mentioned above, the FCA’s expectations for clarity and consistency across the FS sector is increasing. The latest demands are focused on the quality of wind-down planning and risk mitigation, including contingency planning for loan performance, that FS businesses have in place.

Common issues in wind-down planning are unrealistic run-off or cash flow assumptions and not fully understanding or considering all strategic options. The FCA is also particularly interested in how wind-down plans will be funded and who will take ownership to see them implemented, if needed.

For more information on financial services restructuring, please contact Chris Laverty

Real estate restructuring

On 16 June, the government announced that it would extend the current moratorium to prevent landlords from evicting commercial tenants due to non-payment of rent by nine months to 25 March 2022.

The extension of the moratorium gives tenants more breathing space to agree deals with their landlords and to manage reopening cash flows while other government liquidity support, such as the furlough scheme and business rates relief, begin to taper away.

Plans were also announced by the government to introduce legislation to ringfence outstanding rent incurred when certain businesses had to remain 'closed' (eg, nightclubs).

Although there are currently no details, initial government guidance is clear that landlords are expected to "share the financial impact with their tenants" in respect of this ringfenced debt. The legislation will include a binding arbitration scheme to resolve disputes between landlords and commercial tenants.

At present, it isn't clear what the definition of ‘closed’ will be and whether many businesses will fall into this category. Rent incurred by businesses that were open but operating with restrictions in place is likely to account for a significant proportion of the £5.3 billion 1 of rent owed by retail and hospitality businesses. Without further detail, the implications for many landlords and tenants are subject to speculation and uncertainty.

We're working with lenders, landlords and tenants across a broad spectrum of real estate assets, which means we have real-time insights into rent arrears negotiations.

The basis of many negotiations includes discharging a proportion of rent arrears and deferring the remainder over an agreed period. At this point in time, it's impossible to know whether the terms of these deals will be more or less generous than the parameters of the new legislation.

Therefore, while this uncertainty remains, some landlords and tenants may now be more inclined to agree consensual deals.

We recommend that landlords and tenants continue to engage proactively, considering rent exposures in the context of the measures announced to date and potential contingency measures once the legislation has been finalised.

For more information on real estate restructuring, please contact Oliver Haunch

Hotels restructuring

The easing of operating and travel restrictions in Q2 meant that most UK hotels were able to reopen to the public, albeit with some restrictions still impacting food and beverage, indoor leisure, and meetings, incentives, conferences and exhibitions (MICE) facilities.

Trading performance in Q2 has primarily been driven by demand for weekend leisure visits and weddings. UK hotel occupancy bounced back from around 30% in Q1 to around 65% by the start of June 2021 2.

The recovery in occupancy has generally been quicker in country and coastal leisure locations with STR reporting seven out of the top 10 performers being in the south-west of England. Occupancy in city centre locations has remained largely subdued, particularly in London which was around 25% behind regional UK hotels in Q2 3.

Outlook for Q3 and beyond

While domestic leisure demand will no doubt provide many hotel operators with a welcome boost in trade, Q3 is likely to be one of the most-challenging quarters since the start of lockdown.

This is due to a number of operational and financial headwinds, including: 

  • managing the cost of reopening with the tapering of various liquidity support schemes (particularly the job support scheme and business rates relief)
  • staff shortages due to recruitment challenges and self-isolation requirements
  • cost inflation
  • limited demand from international travellers 

While ‘Freedom Day’ on 19 July has been dominating the headlines recently, the final major step in the reopening process will be when international travel returns to normal. At present, it isn't certain how long international travel restrictions will remain in place.

Our current estimate is that demand for UK hotels from international travellers will remain heavily subdued throughout the winter months until Q2 2022, when global vaccination rates should be higher.

In the meantime, it's vital that operators continue to consider the cash impact of changes in demand and easing of support in their short and long-term cash flow forecasts. And that they continue to run a number of scenarios as they manage their way back to viability.

There have only been a handful of hotel insolvencies so far in 2021, which is lower than anticipated and largely due to a combination of liquidity from the government’s support schemes and continued lender forbearance.

The latter is, in part, due to senior lenders having adopted more conservative loan-to-value ratios (LTVs) following the global financial crisis. Therefore, value has to significantly deteriorate before it becomes a problem for most lenders to deal with through a formal process.

We're anticipating an increase in activity in the second half of 2021, as we're expecting lender forbearance to ease once hotels’ Q3 trading results are available. We expect a lot of this activity will be consensual refinancing or M&A transactions, rather than insolvencies.

For more information on hotels restructuring, please contact Oliver Haunch

Care homes restructuring

Many care home operators have reported strong results throughout the last 12 months, due to the receipt of support monies provided to offset the impact of reduced income and increased costs. There's significant uncertainty as to how long this support income stream will continue, however.

The Infection Control Fund has just been extended to the end of September 2021, which many feel may be the final extension. The extra £251 million of funding is split - £142.5 million for infection control measures and a further £108.8 million for lateral flow testing.

This is a new grant, with separate conditions, and brings the total ringfenced funding to help reduce the rate of coronavirus transmission within and between care settings to almost £1.5 billion, plus around £400 million to support staff and visitor testing. We estimate that this latest funding allocation could be worth something of the order of £300 per registered bed to care home operators.

There's no doubt that these support monies will cease well before care home profitability has returned. As such the support monies received by care home operators will be needed to support care home operations for many months moving forward.

The best indicator for care home profitability is occupancy. The recognised market average occupancy for the care home sector was a percentage point or two under 90% before lockdown. As widely reported, however, occupancy has suffered significantly with evidence (both reported and anecdotal) indicating that most operators had lost around 10% of occupancy.

Following the end of the second wave of infection in Q1 2021, there was an expectation within the industry that occupancy would start to improve. So what has happened over the past three to four months?

Market intelligence is indicating that while operators are seeing a small increase in occupancy levels, the increase is not as marked as expected. In fact, we understand from several operators that the increases seen since the start of Q2 2021 are lower than they would normally have seen following the winter season. In other words, seasonally adjusted, there is no discernible growth in occupancy.

Based on the evidence that we've collated, given that occupancy build is unlikely to be uniform with the seasonal impacts on resident levels including the winter flu season, we consider that occupancy levels will not reach pre-COVID levels until the Summer of 2023 at the earliest.

Therefore, the support monies received by care home operators to date could potentially be needed to support trading for a further two-year period. The crucial question is, have care home operators retained enough of the support funding received to cover this length of period? The answer for some operators will unfortunately be no.

For more information on care homes restructuring, please contact Daniel Smith →

Retail restructuring

The latest Office of National Statistics (ONS) retail sales data gives positive signs of the much-anticipated consumer spending bounce, and we summarise below the key takeaways from the latest data:

2021’s retail recovery

In our last quarterly review, we noted that 2020 was not a bad year for retail as sales grew by 2.3%, driven by food sales and a step-change in the shift towards online shopping.

Retail sales in the six months to end of June 2021 were 6% higher than the same period in 2019 (chart 1), and 6.5% higher than the same period in 2020. The quarterly growth is even more impressive, with retail sales in Q2 2021 growing 11.8% on Q2 2019.


Figure 1: Quarterly retail sales. Source: ONS.

The reopening of non-essential stores in April, the easing of restrictions on indoor gatherings in May, and the Euro 2020 international football competition appear to have spurred this growth in spending.

Non-food store sales in H1 2021 were 4.2% higher than H1 2019, and 13.7% higher than the same period in 2020. As expected, the reopening of non-essential stores was the key driver of this growth. Online penetration in non-food sales decreased slightly from 56% in Q1 2021 to 40% in Q2 2021. This is still over 10 percentage points higher than the online penetration in the same period in 2019, indicating the shift to online which we commented on in our last quarterly review.

Food store sales continued to enjoy growth in 2021, with the latest data showing that sales in H1 2021 grew 8.2% on the same period in 2019. There was slight fall in online penetration in food sales from 11.6% in Q1 2021 to 10.5% in Q2 2021. However, this is still nearly double the online penetration of food sales in Q2 2019, highlighting the structural step-change in food retail.

The textile, footwear and clothing sector still remains challenged. While sales in the sector for H1 2021 were higher than the same period in 2020, the sector’s performance is still 26.1% lower than the same period in 2019.

The reopening of non-essential stores meant that physical store sales accounted for over 70% of sales in the sector. Online penetration eased back from 54.7% in Q1 2021 to 29.2% in Q2 2021. The structural shift to online is also relevant for this sector, as Q2 2021 online penetration is around 10% higher than the same quarter in 2019.

Who benefitted most from the growth in online sales?

The latest data shows that overall online sales penetration was at 28.2% in Q2 2021, compared to 18.9% in Q2 2019 (chart 2). While this represents a decrease on the peak of 35.2% in Q1 2021, as we have noted previously, online sales have accelerated a decade-long trend.


Figure 2: Retail online sales. Source: ONS

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. 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, will now have a bigger share of online sales with around 52% of total online sales. These multichannel retailers enjoyed online sales growth at an astonishing rate of 64% year-on-year in 2020.

Successful multichannel 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 the 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.

For more information on retail restructuring, please contact Senthil Alagar →

Get the latest trends and insights into what’s happening across the retail sector

Food and beverage restructuring

UK sector decline in 2020 and latest recovery indications

Since 19 July, pubs and restaurants are no longer restricted to table service only, and there are no limits to indoor service at restaurants, bars and pubs. Nightclubs have also reopened.

The easing of restrictions has been welcomed by the hospitality sector, which has been severely impacted since restrictions were introduced. The food and beverage service sector’s revenue declined by 42% in 2020, while the wider economy’s GDP only declined by 9.2%.restructuring-review-q2-food-and-beverage-revenue.svg

Figure 3: Food and beverage revenue. 

Since outdoor service resumed in April 2021 for England, the sector has been recovering. By end of May 2021, food and beverage service sector turnover recovered to 78% of May 2019 levels. This is remarkable given that indoor service only benefitted half the month’s trading in May. It's a positive sign of the much-anticipated consumer spending bounce in the hospitality sector.

The recent Barclays Consumer Spending report also noted signs of this recovery, and revealed a difference in recovery speed at restaurants versus bars and pubs, where operators already had outside service space or were able to adapt gardens and outside space to become beer gardens and dining areas.

Consumer spending in bars and pubs was only 19.4% below May 2019 levels. However, spending in restaurants was 53.2% below 2019 levels – this is still a positive sign for the sector. The Barclays data also indicated that consumers were spending more per transaction than before.

Following the announcement on easing of restrictions, the government also announced its hospitality strategy, which was produced in conjunction with industry business leaders. The strategy sets out various measures to assist the recovery of the sector. 

The measures include making it easier for pubs, restaurants and cafes on the high street to offer al fresco dining and serve more customers outside, with pavement licenses being extended and made permanent. The temporary permissions for off-sales of alcohol are extended to 2022 in England and Wales.

The initiatives have been welcomed by the British Beer & Pub Association and UK Hospitality, while a new Hospitality Sector Council has been set up to involve different business leaders in overseeing the delivery of the strategic initiatives announced.

While there is indeed much to be welcomed in the proposals and the signs of consumer spending bounce are encouraging, the recovery path ahead will depend on how consumer demand develops in different areas and will be subject to the UK’s recovery path.

The hospitality strategy paper itself acknowledges that demand could take longer to recover in city centres, such as London, due to the lower tourist and office worker footfall. Inbound tourism to the UK is still likely to remain low in 2021 and will affect hospitality businesses, particularly in London. 

Rent arears still to be resolved

Unpaid lockdown rental payments and the level of ongoing rent costs on reopening remain key financial issues for the hospitality sector. Retailers and other commercial tenants are estimated to have delayed rents of £6 million, with the hospitality industry estimating that £2.5 billion of rent is in arrears.

UK Hospitality estimates that 40% of businesses in the sector have not reached agreement on rent arears.

As businesses reopen and recommence trading, the government has stated that it expects businesses to pay rent in line with lease obligations. However, this will be difficult for many businesses that will continue to experience some shortfall in revenue against 2019 levels in the short to medium term.

As a consequence, many operators have sought to negotiate rent concessions with landlords to make their business models more financially viable.

Staff shortages and self-isolation are critical issues

Since reopening, the sector has faced a critical problem with staff shortages. Restaurants and pubs say that up to a quarter of those employed will not return back to the sector. The UK’s largest-listed pub group, Mitchells & Butlers, has lost 9,000 of its 39,000 staff since last year.

In May 2021, there was a 30% reduction in the hospitality workforce compared to February 2020. More than 30% of hospitality workers across the UK are thought to have come from Europe. That number was higher than 50% for hospitality workers in London. There's also uncertainty over the return to the industry of people who were furloughed. 

The staff shortages have led to wage inflation for specific roles in the sector, and the impact of these rising costs will adversely affect profitability, as businesses try to navigate the revenue recovery path.

What are lenders looking for?

Alongside government support measures to the sector, lenders and debt providers have also supported businesses in the sector through waivers and resetting of financial covenants, rescheduling of loan amortisations and extension of maturities, as well as new money funding. This collective support, alongside the restrictions on winding up petitions and statutory demands, has suppressed the level of corporate failures in the sector.

Lenders will be wary that the sector’s trading performance still carries the risk of uncertain demand recovery, rising costs, and staff shortages or self-isolations impacting revenues. In addition, financial viability in the sector will be dependent on whether businesses can sustain the additional debt accumulated through financial borrowings, HMRC obligations and unpaid rentals.

Lenders will expect clear and robust financial projections from borrowers for lending considerations, with a requirement for independent assessment of business plan risks and sensitivities. 

Lenders will clearly keep a keen continued focus on demand recovery trajectory and weekly trading results. In addition, borrowers in the sector will need to demonstrate how their business model has been adapted to consumer behaviour changes, and how their proposition remains attractive to the consumer in a very competitive sector. This was a critical factor for the sector and it will continue to be a key risk factor that lenders will consider in their lending assessment.

Typically, as part of their credit assessments, lenders would consider a business’ LTM (last twelve months) EBITDA. That is of limited use given the impact on 2020 trading. Therefore, lenders are likely to focus on comparing trading performance against 2019 levels and consider if there is any permanent benefit to trading from self-help cost saving actions or consistent uplifts from online or takeaway services. Presenting this in a clear and compelling way will be critical for borrowers.

We're also seeing lenders place greater scrutiny on the strength of the management team’s operational capability. Over the past 14 months, lenders have seen capable management teams reviewing end-to-end cost structures, adapting business operations with online table orders and payments, as well as pivoting to takeaway service and increased use of dark kitchens.

We expect lenders to be very focused on operational management capability in their credit risk assessments for ongoing and new lending considerations. In this regard, we expect lenders to seek management’s plans for dealing with potential future downside scenarios as part of their lending considerations.

Finally, lenders will reflect on the extent of shareholder support to the business, as well as, assessing the potential for further support in the future should it be required in a downside scenario. Sponsors that provided financial backing to portfolio companies when it was required during the past 14 months will have maintained and strengthened relationships with lenders and debt providers.

For more information on F&B restructuring, please contact Senthil Alagar →

Get the latest trends and insights into what's happening across the food and beverage sector

Automotive restructuring

Car manufacturers moving to direct online sales, causing concerns for dealerships

We're seeing the early stages of some manufacturers terminating dealership agreements and promoting the ‘genuine agency model’. This approach is the sale of vehicles directly online from the original equipment manufacturer (OEM), effectively using the dealer to fulfil the customer experience and handover process rather than selling the vehicle.

Some OEMs, such as Telsa and Polestar, already do this. VW and others have followed suit on their electric models. As well as being an agent for the OEMs, dealers will continue to sell used vehicles, undertake servicing and provide parts.

We set out the pros and cons of the agency model as follows.


  • Dealers will no longer have to maintain vehicle stock on behalf of OEMs, which will release ‘trapped’ cash
  • Dealers won’t have to tactically register new vehicles or meet sales targets
  • There is the expectation that with fewer dealers, each dealer will hand over more vehicles and potentially become more profitable
  • Although too early to say, the change in the business model from franchise to genuine agency should mean the dealer will have less cost associated with the sale of new vehicles
  • The OEMs will continue to rely on dealers to provide associated vehicle sales services and vehicle servicing & repairs to the OEMs’ customers


  • Dealers may lose the ability to upsell finance and insurance and accessory products with the new vehicle sale controlled by the OEM
  • It is currently not clear whether the OEMs will also direct sell used vehicles under a used car agency model which would have a direct impact on used car sales and profits for the dealers

There is uncertainty in how costs in the dealerships will change. How quickly can costs be taken out of the dealer sales process? What costs will the OEM’s have to take? And importantly what will be the impact on dealer profitability? 

With still many questions unanswered this generates uncertainty for the industry.

While not imminent, this change in approach is expected to make a significant difference over the next five years. Funders are also working through what this means for the structure of their funding and how they can support businesses.

Rising used car prices potentially a risk for the future

Used car prices are rising due to a perfect storm, including:

  • Production issues delaying new car supplies
  • Public fears over public transport
  • A lack of fleet cars coming into stock

This presents a future risk for dealers that either they won't be able to buy stock, impacting profitability in the short term, or they will acquire stock at high prices, at the risk of demand receding in the future. Stocking loan providers will also be closely monitoring this dynamic.

Vehicle financing companies have had to extend their current contracts as new vehicle replacement stock is not available. Whilst this has meant those customers have been retained, those businesses are likely to make less profit than if the customer was to be sold a new vehicle.

Due to the supply shortage used vehicle values are at record highs. However, new vehicle financing contracts are having their ‘Guaranteed Future Value’ residual values based on current inflated used car prices. The question is who will cover this potential cost in three years’ time when the market value of the car exiting its contract is significantly lower than its contracted residual value?

Supply chain

Worldwide vehicle production continues to be disrupted by a shortage of semiconductors, metal, plastics and rubber, causing further factory closures at a number of the motor manufacturers including JLR, VW, Ford and Nissan.

We're starting to see this impact UK Tier One and Two suppliers through a reduction in orders and consequent trading losses and breaches of lender covenants. While semiconductor production capacity is increasing, we understand the current deficit is likely to continue to cause issues at least over the next six months.

For more information on automotive restructuring, please contact Helen Dale

Graphical analysis

Insolvencies by region

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

Consistent with our Q1 2021 and Q4 2020 data, Greater London had the largest number of insolvencies, and Northern Ireland had the fewest followed by Wales.

Q2 saw fewer insolvencies compared to Q1 in the majority of regions apart from East Midlands and West Midlands. Insolvencies per region in Q2 of this year were up on those of Q2 2020.


Figure 4: FY21 Q2 Insolvency by geographic location.


Figure 5: Insolvency by geographic location comparison.

Insolvencies by sector

There has been little change in the spread of insolvencies by sector since our Q1 review. The top four sectors for number of insolvencies remain the same, with professional, scientific and technical activities still in the lead, and the three sectors seeing the fewest insolvencies have remained the same.

The number of insolvencies by sector has increased in all sectors for Q2 of this year compared to Q2 of 2020.

The number of insolvencies by sector has dropped off from Q1 in the majority (eight out of 13) of the sectors highlighted.

This is not the case for construction, accommodation and food services activities, wholesale and retail trade; repair of motor vehicles and motorcycles, manufacturing, and transportation and storage – all of which experienced more insolvencies in Q2 than in Q1.


Figure 6: FY21 Q2 Insolvency by SIC code.


Figure 7: Insolvency by SIC code comparison


1 UK Hospitality and British Retail Consortium

2 Rolling 7 days occupancy to 6 June 2021 for hotels that are open and reporting data, STR, June 2021. 

3 Actualised occupancy by week, STR, June 2021.