Challenges will likely manifest in rising level of restructuring activity throughout 2022
The true effect of the Covid-19 pandemic on Irish businesses remains largely unknown as Government support measures remain in place and mask the true trading performance of many companies, according to insolvency partner Hilary Larkin.
This is reflected in the level of corporate insolvencies recorded in Ireland so far in 2021 – which has actually fallen by 38 per cent compared to the same period in 2020, from 273 to 169. More tellingly, there were 310 corporate insolvencies in the first half of 2019: the 2021 figure represents a 45 per cent decline on that number, suggesting that current levels of insolvencies are artificially low.
“Businesses will likely face significant liquidity issues, and adequate cashflows will be required to discharge legacy liabilities and simultaneously fund investment in working capital arising from increased trading levels,” Larkin notes. “These challenges will likely manifest themselves in an increased level of restructuring activity throughout 2022.”
In this context, the passage into law of the new Small Company Administrative Rescue Process (Scarp) restructuring tool could hardly have been more timely.
“Scarp aims to provide a low-cost alternative to examinership for businesses,” she explains. “It is designed to eliminate or significantly reduce court intervention requirements, which can be costly. One of the main drawbacks of Scarp is Revenue’s ability to withdraw from the process. However, to do so, they must demonstrate that there is a history of non-compliance.”
Another key consideration is the repudiation of onerous contracts such as leases which are likely to be a common theme facing companies in distress, given the move from “bricks and mortar” to “click and order” and the hybrid working model.
“Whilst repudiation of leases is provided for in Scarp, it requires court approval which will introduce additional costs to the process,” Larkin points out. “On balance, Scarp is a welcome tool, and the process is likely to be considered widely by SMEs in distress but with viable underlying businesses as a means to cram down unsecured debt.”
Another feature of the past 12 months has been an unprecedented level of M&A activity, according to John Bowe, corporate finance partner. “This activity has been driven by the fact that many sectors have not been impacted by Covid and have continued to show strong year on year growth,” he explains.
“The Irish market has many sources of funding available to it, providing the capital to fund transactions. Besides the senior banks, we have a very active domestic and international private equity pool of capital in addition to numerous direct lenders who are happy to lend to Irish companies.”
He notes that many domestic private equity operators have raised a second fund over the last 12 months. These include Melior, Cardinal, MML, Development Capital, Renatus and Erisberg.
“Other Irish operators in the market, BGF and Causeway, are also active. These funds are all looking to deploy capital and support the growth of ambitious Irish companies.”
These funds primarily seek to provide funding for organic growth, expansion, acquisitions, management buyouts, and shareholder reorganisations to allow some shareholders to exit or owners to de-risk their financial position by selling a percentage of their equity.
“The key for founders and management considering private equity (PE) as a funding source is to do your due diligence,” Bowe advises. “The money part is the commodity, and there is plenty available. You should only consider taking on PE if the funds can demonstrate that they can add value to your growth story through their network, experience, track record and so on.”
Direct lending funds represent an alternative to private equity and bank debt. “These funds have been around for a long time in the US and are firmly established, accounting for around 85 per cent of the primary loan market,” says Bowe. “Over the last five years, it has taken off in Ireland, with many domestic and international funds operating in the market.
“They look to bridge the gap for businesses who want to fund growth, acquisitions and shareholder reorganisations without giving up equity. Some of the active operators in the Irish market include Beachpoint, Beechbrook, Dunport, Muzinich, Proventus, Silicon Valley Bank and Harbert Management Corporation.”
He advises business owners to look at all their funding options. “Overall, it is timely in the current environment to run competitive funding processes, given the level of debt funding options and the number of domestic and international private equity players who are actively looking at Ireland.”
This article first appeared in The Irish Times, July 29 2021