Construction in Crisis – Time for a Reconstruction?

The ongoing economic crisis continues to take its toll on the construction industry with the sad news that a high profile company that was more than 100 years old has gone into administration.

KPMG have been appointed as administrators of London-based Holloway White Allom, which recently completed a refurbishment of the Victoria & Albert Museum, for which it won a conservation award.

The company, founded in 1882, was known for high profile contracts including the refurbishment of the Bank of England in the 1930s, the construction of Admiralty Buildings on Horse Guards Parade, of the Old Bailey in the early 1900s and the fountains in Trafalgar Square.

Although the company was undergoing a turnaround and restructure, following a cash injection earlier in the year from private equity firm Privet Capital, it is understood that it was forced into administration by late payment for one large project.

This latest high profile casualty comes as the construction industry faces increasing pressure. ONS figures show that output on public housing was down by 5.3% and on other public projects by 7.5% during the three months to August 2011 compared with Q3 last year, and accountancy firm Deloitte reports that the number of property and construction companies that went into administration in Q3 2011 rose by 11% to 117 compared to 105 in the same period last year.

However, some sectors of the industry are faring better than others.  Bellway, for example, this week posted a 50% annual increase in pre-tax profits, smaller construction companies focusing on repair and refurbishment are also surviving well and commercial construction activity has increased for the 19th month in a row.

Those companies that took steps to restructure their business to focus on what is likely to survive in a declining market and to deal with indebtedness early in the recession have done well. 

This suggests that those companies with a bad debt or over-indebtedness due to historical loans should consider restructuring their businesses before they run out of cash. It is not too late for them, but they are likely to require a restructuring adviser to help them.

Businesses Should Pay Down Debt and Beware Offers That Seem Too Good to be True

Many businesses are overburdened with debt and desperate for ways to deal with pressure from banks, HMRC and other creditors. All too often they are prepared to pay off old debt by taking on new debt which leaves them vulnerable to unscrupulous lenders.

Prior to 2008, interest-only loans and overdrafts were a common method of funding, and were reliant on being able to renew facilities or refinancing.

Like many interest-only loans, an overdraft is renewed, normally on an annual basis, but it is also repayable on demand. What happens when the bank doesn’t want to renew the overdraft facility?  With the economic climate continuing to be volatile and uncertain and banks under intense pressure to improve their own balance sheets, they are increasingly insisting on converting overdrafts to repayment loans and interest-only finance is disappearing.

This has created a vacuum for alternative sources of funding to enter the market where distinguishing between the credible salesman and the ‘snake oil’ salesman can be very difficult. Desperate businesses are desperate often try to borrow money and become more vulnerable to what at first sight seem to be lenders that can offer them alternative funding solutions that the banks cannot.

Generally the advice is to beware, as the recent eight-year prison sentence handed to “Lord” Eddie Davenport illustrates.  The charges related to a conspiracy to defraud, deception and money laundering, also referred to as “advanced fees fraud”. 

The court found Davenport and two others guilty in September. Meanwhile a large number of businesses had paid tens of thousands of pounds for due diligence and deposit fees for loans that never materialised and left victims even deeper in debt. The case only became reportable in October, when restrictions were lifted.

Many businesses just want to survive and are trading with no plan or in some cases no prospect for repaying debt. In such instances they should be considering options for improving their balance sheet by reducing debt. Options might include swapping debt for equity, or debt forgiveness by creditors or setting up a CVA (Company Voluntary Arrangement).

Leadership, Restructuring and the Eurozone

The Germans and other northern members have benefited from the Euro effectively fixing the exchange rate that has made it easy and relatively cheap for them to sell their cars etc to southern members to whom they lent money to buy their cars. This is very similar to the banks lending money to customers who spent it.

The issue then is who takes responsibility for the debt and managing the Eurozone fallout. Do lenders write off debt, or do they lend more such as via Eurobonds or Quantitive Easing (QE) with terms that impose huge penalties. This latter route is similar to the reparations that planted the seeds of the second world war, a subject that has recently been put on the table. Or do lenders defer payments that allow for a fudge whereby loans are repaid over an extended period that effectively allows inflation to devalue the loans.

The UK has opted for the fudge route and will avoid banks defaulting through QE, low interest rates and using inflation to reduce the cost of repaying debt. While most borrowers will benefit, those with assets, savings and reserves will see them devalued while the debt overhang is cleared. Although this is regarded by many as a mistake, we saw in 2007 and 2008 what happens when banks default and are right to avoid bank defaults.

Europe however has yet to find a solution whether it is by managing southern member defaults, or providing more loans to avoid default. The problem facing European leaders is that they need to be strong and stand up to their electorates if the lessons of history are to be applied.

While European leaders find their backbone, in UK our political leaders are looking decisive, a tribute to both Darling and Osborne. Inspite of the decisions taken it will still take a long time to clear the debt overhang with a floating exchange rate and inflation to reduce debt and low interest rates to smooth the way.

Most UK companies that have undergone restructuring have much stronger balance sheets and are building reserves ready to take advantage of the Eurozone fallout. However there are still many more UK companies, that like many European members, have weak balance sheets and continue to struggle while they and their lenders put off the inevitible restructuring.

Winding Up Petitions

269 Company Winding Up Petitions are due to be heard in the High Court this coming Monday, 19th September where the list is still dominated by HMRC petitions.

None of the Companies listed are well known and unusually there are no football clubs listed however one with the name Three Merry Lads Ltd sounds like an interesting business.

Since introducing our handholding service for directors dealing with a Winding Up Petition, it is unusual for K2 not to have anyone to take along on Monday. We like to take directors to the High Court in London several weeks before their company’s Petition is heard so they know what to expect, but we continue to be surprised that so many reject the offer of this free service.

If you know anyone dealing with a Winding Up Petition or have a client who would like to come along to the Companies Winding Up Court on Monday or indeed any Monday do get in touch, call over the weekend if you want to join us on Monday 19th.

We love it whan a petition is dismissed following approval of a CVA.

Bring Back Pride in Non-Academic Skills

August may traditionally be the “silly season” but last month the news did not stop rolling with turmoil on the world’s markets, the A level results and furious debates about the causes and consequences of the UK riots.

We argue that it is time for some joined-up thinking, as there is a connection between the three.

First, the markets: growth, even in the EU’s so-called engine of growth, Germany, was revealed to be near-stagnant in Q2 and UK Growth has been near stagnant for the last three quarters. The UK unemployment figures for the same quarter rose by more than 38,000 and the youth unemployment rate rose to 20.2%, from 20%. All this has prompted fears of a double dip recession, a return of pessimism among UK employers and turmoil on the markets.

Economic recovery is supposed to depend on manufacturing, exports and crucially growth in the UK’s small business sector. However, a new British Chambers of Commerce survey of 2,200 SMEs employing fewer than 10 people, has revealed that while more than 55% were actively recruiting, they were held back by a lack of sufficiently skilled applicants and only 22% said they would feel confident that a school-leaver with A-levels or equivalent would have the necessary skills for their business.

Secondly, following the A level results, it was revealed that approaching 200,000 candidates were seeking a university place through clearing and only an estimated 30,000 places were likely to be available. What happens to those who are unable to get a place?

Finally, the riots and their causes: as the culprits have been wheeled through the courts it has become clear that the overwhelming majority have been under the age of 25, half of them under age 18, and all living in some of the most deprived areas of the country, young people who are unlikely to go to university but, worse, have little hope of acquiring the skills they need to get any kind of job.

K2 argues that the focus of successive governments on pushing more and more young people through university has devalued both the degree itself and the more practical vocations and trades on which economic recovery depends.

According to the REC although more than 250,000 apprenticeships were created in the last financial year this figure includes a big increase in short-term apprenticeships – often taken up by those already in employment and a greater number of these positions have gone to the over 25s. training and being used as a source of cheap labour.

Career advice for young people has also all but disappeared. New figures published by the public service union UNISON showed only 15 out of 144 councils still run a full careers service after implementation of government cuts.

The most crucial need is to restore the pride and aspirations of those young people who perhaps would not benefit from a university education so that they believe that they can both earn a living and use their practical skills to contribute to economic recovery and growth.

Latest insolvency stats suggest Zombie companies are still hanging on

The latest Insolvency stats suggest that Zombie Businesses are holding back the UK Economy.

A summary of the Q2 2011 UK insolvency statistics shows: Compulsory Liquidations up; Voluntary Liquidations down; Administrations down and CVAs static.

Against a background of slowing growth over the last three quarters of the UK economy, perhaps the picture of what has been going on is becoming clearer.

Unlike most insolvency and turnaround practitioners, I do not believe that we will soon be busy restructuring the large number of over-leveraged businesses.

I believe businesses are putting off restructuring and will do so for as long as possible, at least while the economy is uncertain. Historically insolvencies have increased during the upturn after the bottom of a recession, when business prospects can be predicted. Right now it is not clear if we have reached the bottom and if there will be any growth, let alone how much, or if the market will flatline for some time.

One set of figures, the increase in compulsory liquidations, does indicate a level of frustration over companies not taking action to deal with their debts. Creditors are becoming impatient with directors who are putting off restructuring and starting to force their hand by issuing a winding up petition. But even these figures are very low.

The tragedy is that without restructuring, a great many so called ‘Zombie businesses’, lack optimism to plan for the future. They have run down their stock levels, cut staff to the bone, do limited marketing, are not investing nor looking for growth opportunities let alone looking abroad and are not laying foundations for their future.

The lack of optimism is resulting in quality and service levels being in decline and as a result they are holding back economic recovery because they are not investing in it.

Successful retail business models can overcome a depressed market

Despite the ongoing doom and gloom on the High Street there have been some success stories.

They all illustrate a crucial point – that retail decline is not terminal, as long as businesses think innovatively.

Coffee Nation, which has recently been bought by Costa Coffee, achieved its success by cleverly positioning its machines in existing outlets, including Tesco Express, Texaco, Shell and Welcome Break, delivering fresh ground coffee from bean to cup. 

This machine with a back-up maintenance service and piggybacking into already well-known outlets kept costs to a minimum.

Peterborough-based Kiddicare is essentially an online store but with one larger than normal warehouse/store, where customers can browse then place their orders and organise delivery online at the in store booths. The company has recently been acquired by the Morrissons supermarket chain.

Similarly, an electrical goods supplier, in an Eastern European country with very limited infrastructure or internet access, positioned some of its electrical goods in village stores and them with internet access and terminals for customers to make orders and organise delivery to the shops for pick-up.

In my view these retail business models show that a new way of doing business is emerging where the retailer no longer needs their own premises but provides online access, and a nominal level of in-store stock or samples for consumers to see.

With a bit of thought and planning and a proper business model there is no reason why larger retail chains could not operate similar schemes to prosper as well as bringing some life back into village stores and Post Offices to help restore them as the viable, environmentally friendly community hubs they once were.

Saving insolvent companies needs both a restructuring and business plan

Following the demise of Rok and Connaught, a third national building maintenance company, Kinetics Group, has gone into administration with 500 employees being made redundant leaving a skeleton staff of 50 to deal with its five sites.

Insolvency practitioners Begbies Traynor were appointed as administrators in July and attribute the demise to the loss of key contracts and delays in payments by customers.

The background to this dramatic failure seems to be rather complicated. In June 2011, there appears to have been an attempt to save the company through acquisition of the business and assets of a number of its own subsidiaries by a newly formed subsidiary SCP Renewable Energy Limited (SCP).

It is not yet clear if the acquisition took place before or after these companies were placed in liquidation or administration and a further complication is SCP Renewable Energy Limited’s status, referred to by the administrators as a newly incorporated company owned by Kinetics. But this name is not listed at Companies House.

In my view it is clear that the June restructuring was flawed. What exacly was the role of the various stakeholders? Did they ensure that viable restructuring and business plans were in place as a condition of their approving the acquisition?

Is this an issue with the sale of business and assets by an administrator, where the administrator is not responsible for the ability of any purchaser to run or fund the acquired business?

Administrators rarely save a company as a going concern, so their only real objective is to maximise realisations for the benefit of creditors.

How to protect Personal Guarantees when a company is insolvent

Many insolvent companies are being run to avoid the triggering of personal guarantees given by directors and owners.

Most personal guarantees are provided to secured creditors such as a bank to cover loans or overdrafts that are already protected by a debenture which provides for a fixed and floating charge over the company’s assets. In such cases the personal guarantee is often only triggered by liquidation when the bank is left with a shortfall.

In view of the above I am astonished how many directors plough on, stretching payments to HMRC and extending unsecured creditor liabilities without fundamentally improving their company’s financial situation via a company voluntary arrangement (CVA).

Secured creditors stand outside a CVA and therefore they have no need to call upon a personal guarantee.

I would urge all professional advisers, including accountants, lawyers and consultants to learn about CVAs since they are such a powerful tool for saving companies and in so doing avoiding personal guarantees being triggered.

Many companies for sale turn out to be insolvent

Many companies are being listed for sale through brokers with high price tags based on very tenuous valuations, where the owners have been deceived into thinking they will be paid a huge amount for their equity.

However, on closer inspection it turns out that many of them have a Time to Pay arrangement with HM Revenue and Customs or are in arrears with the Revenue and are stretching their trade creditors. All too often they are insolvent but don’t realise it. 

This over indebtedness is becoming a serious concern among potential investors because often the company they want to buy is operationally a great business and for trade buyers a perfect fit with their existing businesses. The problem for investors is how to protect their own interests and avoid contamination.

Very often, even experienced executives lack the knowledge and methodologies for assessing a company they want to buy, let alone knowing how to sort out the indebtedness once due diligence has revealed its extent.

In my view, potential investors can work with incumbent directors to reach agreement with creditors that protects all parties by enhancing the prospect of a return to sellers and avoiding cross contamination.

One method I use is an investment, conditional on approval of a CVA by creditors thus leaving finance agreements and any liabilities in the target company. It also allows creditors’ issues to be addressed where they are not normally consulted in a pre-pack. For the investor, this can be structured to give them security and control if they so wish.

As a rescue specialist I would advise owners trying to sell a business in difficulty to employ their own turnaround advisers before putting the business on the market.