End of government Covid support set to cause further corporate distress

Restructuring experts have warned that many of the businesses that took Covid-related financial help in 2020 will be in distress again this year as UK government measures to support companies unwind next month.

Almost a third of global restructuring experts said that more than half of their clients that needed financing during the pandemic in 2020 would find themselves in financial distress again, according to an industry-wide survey by consulting firm AlixPartners.

Joff Mitchell, global joint head of the firm’s turnround and restructuring services practice, said “one of the biggest threats facing companies at the moment is the inevitable increase of the cost of debt and the withdrawal of pandemic-related public funding”. 

In the UK, the ban on commercial rent evictions as well as Covid-linked insolvencies comes to an end this month, with many businesses also needing to start repaying ‘bounceback’ Covid loans and wages given the tapering of the furlough scheme. About £6bn of rental debt is owed to commercial landlords.

AlixPartners said it “feels like businesses are defying gravity in the UK” because of an unprecedented level of financial support from the government that has kept many businesses afloat. Corporate insolvencies in the UK are at a 32-year low. 

[It] feels like businesses are defying gravity in the UK

Alix said that insisting on repayments before revenues had recovered would lead to mass business failure, however, and the government was unlikely to want that deadline to be labelled as the reason for the collapses.

“Moves to extend the runway for businesses seem likely, which in turn should push out activity in the formal restructuring space out to 2022,” it said.

Business leaders have also warned that a delay to the reopening plans next week could further hit businesses, and have called for extra help from the government in this case. 

Alastair Beveridge, managing director at AlixPartners, said many companies had survived Covid but now carried a much higher level of debt, which could be “significantly problematic”.

More than half of restructuring experts from across the US and Europe said their clients had performed better during the pandemic than they did during the financial crisis. 

Most attributed this to greater access to cash and debt over the past year — a situation likely to continue with more than two-thirds of restructuring experts across Europe and almost half in the US also expecting interest rates to remain low over the coming months.

Yet, in spite of the available liquidity and low interest rates, almost all restructuring experts believed the pandemic would cause further distress this year, and in particular among those sectors that were seeing only a slow recovery in areas such as aviation.

The findings are based on a survey by AlixPartners of more than 500 restructuring experts from global financial advisory firms, banks and law firms and corporate professionals.