Video transcript: Restructuring trends with Catherine Atkinson and Ed Macnamara

Transcript

Catherine Atkinson: Thanks Victoria. I'm Catherine Atkinson and I'm joined by Ed Macnamara and we both work in the financial restructuring and insolvency team here in London. We're going to spend just a few minutes sharing some thoughts and views on what we're seeing in the restructuring market, building on some of the themes and the economic backdrop that Alan and Gavin have just been discussing. So, I wanted to start with a snapshot of consumer sentiment over time. Whilst the latest view from our economics team is that we'll avoid a recession in 2023, whatever happens, I think we're of the view that there's no doubt that the consumer behaviours, consumers' reactions to all the factors such as cost of living prices, mortgage and interest rate increases, is going to have a critical part to play in how low, how long and who is going to be impacted by the economic slowdown. So, the chart is just one element of our sentiment index that PwC has been performance since 2008. And this illustrates consumers' expectations of their disposable income over the next twelve months. There's tons of information on the chart and we could probably spend the ten minutes just unpicking some of this data, but I wanted to bring out a couple of the key points. So, the first being in September 22, consumer sentiment dropped to the second lowest level ever, so even lower than at the start of the pandemic. And the second, the previous low being that at the start of the global financial crisis. Albeit sentiment has improved, so we saw improvements in both January and the most recent survey in March. And that's the first successive period of improvement we've had since 2021.

But that's still of quite a low base and the spending intentions remain negative, particularly across some of the discretionary categories. I'm going to pick up this later in the discussion. Two final points before we move on, it's worth really noticing that the stubborn levels of inflation that we've had have already had a significant impact on households and businesses. And the analysis that we've done on wages shows that there hasn't been any real wage growth for thirteen years now. And so with that and the continued uptick in interest rates, there will be further long-term impacts on cash flows, cash generation and disposable income for consumers in 23 and beyond. So, whilst we think that the, kind of, “good” businesses are likely to be able to access ever-present dry powder, cash in the system, albeit you could ask at what cost, there are inevitably going to be challenges both for businesses and specific sectors, which will face further pressures over the coming year and into the future.

Ed Macnamara: Thanks, Catherine. If we can move to the next slide. So, what this is not is a piece of modern art. What we did was we undertook a survey across Europe, Middle East and Africa, and we asked business leaders as to which sectors they thought would suffer the most headwinds and therefore where we thought the most restructuring activity would take place. And you've heard from Alan and Gavin around some of the key challenges around inflationary concerns, interest rate rises, supply chain issues, but other things that came through were things around excessive historic valuations, the impact on refinancing risks, post pandemic changes to business models and whether they remain relevant. And so what we want to do in the next four minutes is cover four sectors at pace, and we'll just try and keep those to fairly high level comments. But if we can move to the first one, which we see as having a lot of restructuring activity, that's the automotive space. So, particularly lots of activity at OEMs and Germany being a particular hotspot at the moment. But that, of course, and the challenges permeate across the whole supply chain. And we're seeing that. I'm going to touch on three points. One is around the demand that OEMs put on the supply chain. Secondly, is around the material resources for car manufacturing. And thirdly, is around the more broader transformation agenda. So, firstly, the demand from OEMs and the challenges that poses is that the OEMs demand and change production schedules at will, and that all permeates through the supply chain. And therefore, there's challenges for those trying to predict the forecast.

In terms of resources, certainly the availability of semiconductors, possible materials in the East. You've got commodity prices like steel and aluminium, which have come down a little bit in 2023, but still higher than pandemic levels. But you've got things like lithium, which is used in electric batteries, is one of the hottest sectors from a mining perspective. And so that becomes high in demand. And lastly, around transformation. Certainly, the focus on electrification, ESG and expectations around demand are very high. And that is causing some-, whether it's heavy restructuring or broader transformation, but that will see quite a lot of change over the next five or six years as the number of OEMs push through certainly electric cars. And I think by 2030, the expectation is about 40% of cars being manufactured globally will be electric vehicles.

Catherine Atkinson: Thanks. So, taking construction. So, the first quarter of 2023 marked a ten year low for new construction projects across the UK. We're seeing increases in the number of insolvencies in the sector, and the construction businesses are really facing operational challenges and pressures. And we've put up a chart in terms of property prices, but really what I wanted to focus on is four key matters that we're seeing that the sector's dealing with. And that's inflation and the type of contracts, working capital pressures, labour force, and also regulations. So, taking each one briefly. So, the rising inflation, which we've talked about at length, I guess so far, has added £23 billion so far to construction output costs compared to pre pandemic levels. But what's interesting, I think, from this sector is that the propensity of really tight, really thin margin contracts, the types that typically have fixed margin, fixed price contracts, compounded by the supply chain issues, really means that these companies aren't able to pass on some of those price increases, which is putting further pressures on margins and profitability. The second then in terms of working capital, and I think it's under all of the pressures we've talked about in terms of increasing in costs in the supplies. But actually, the other thing we're really seeing in our discussions is nervousness around the credit insurers. So, the reducing or removing cover altogether with businesses across the sector, further impacting challenges they've got on working capital. The third point is then really around a real shortage of skilled labour, and this has been well documented.

But whilst there's been a decision, I guess, by the government, and an indication that there's going to be new roles that are now going to be eligible for skilled worker visas, we're expecting this to take time to come through. And there really needs to be the labour force to match the growth and the build assumptions that are in these businesses' forecasts. We're expecting to see a challenge there. And then the final point is around the increased regulatory focus. So, there's huge amounts of increase in terms of both building safety and obviously ESG, with new regulations, changing methods to meet the increased demands for sustainable building. So, all really coming into the mix around a huge amount for the sector to be grappling with. And then turning to retail and hospitality. So, I'm sure it's no surprise that one of the key sectors we wanted to touch on was the retail and hospitality industry. And whilst we are seeing that there are some sub sectors that are doing okay, so there were a number of travel companies still really benefiting from that post pandemic feel good factor, but also potentially spending commitments that were made eight-ten months ago, we really think there are businesses that are going to be reliant on discretionary spend, are going to find it tough. So, this chart illustrates spending intention, again, from the consumer sentiment index. I'm going to keep it very simple. Effectively, what we're seeing is that consumers will expect to spend more on food. For those of the things that they love, so people's families, people's pets, they'll spend about the same. And effectively, everything else, we are expecting falls in all of the areas, particularly around that discretionary spend.

There are a couple of points to add in around the polarisation. So, we're seeing quite a difference around age and both socioeconomic groups, with the sentiment improving most in those under 25 and also those over 65. So, the under 25s typically still living at home, the over 65s with savings and are most likely to be mortgage free. So, there is some differences, but actually it's the retailers, when we're thinking about the impact on businesses, those that can position themselves to the right target groups or look at their product mix and see how they can maybe, through alternative products, to enable customers to either trade down if they're cutting back or trade up for those that have got an increased level of discretionary spending are going to be the ones that actually have less challenges faced in the coming weeks and months.

Ed Macnamara: So, I think I've got 30 seconds left on agriculture. Lots of pressure in this sector over the last year. I think there's probably three drivers for that. One is the cost of fertilisers, and that's due to the scarcity of ingredients and also the high energy costs that go into that process of making fertilisers. The second is linked to high energy costs. You know, the UK's ability to greenhouse and those high costs of running greenhouses have meant that actually we've looked more broadly to try and bring particularly salad related products inwards. And I think the low transportation costs has helped that. And I think thirdly, this sort of dynamic between supermarkets and the food producers has gone through a little bit of a change. So, what used to be a very price-focused discussion has moved more towards making sure there's an actual proper demand there and proper supply. And I think over time that once the supply is secured, then actually the discussion will move more back towards price and margin. I think ultimately that concludes our session in a, sort of, whistle stopping ten or eleven minutes. I think there's lots of challenges, lots of volatility and lots of headwinds. As Catherine said, there is dry powder, there is funding out there for good businesses. But I think for those at the other end of the spectrum, there's lots of uncertainty and lots of issues. Over to you Nick.