With signs that the Covid-19 tide may begin receding this year – albeit much later than many hoped six months ago – the Central Bank of Ireland and others are warning that the pandemic's fallout could amount to a crisis of its own. Around 100,000 of those out of work as a result of restrictions could face long-term joblessness, while the Central Bank's governor Gabriel Makhlouf warned this week that almost 25 per cent of small businesses could be vulnerable once State supports are withdrawn.
"Not everyone is going to survive," agrees Ken Fennell, a partner and head of restructuring with accountants Deloitte, who has already worked on cases involving some of the pandemic's biggest business casualties, including Norwegian Air Shuttle and fashion chain Arcadia.
Deloitte recently reported that insolvencies in the Republic fell 30 per cent during the first three months of this year to 111. However, Fennell warns that Government supports are disguising the true extent of the damage that businesses have suffered from 13 months of Covid-19 lockdown restrictions. A true picture is only likely to emerge as the virus retreats, State aid is removed and creditors begin pursuing debts that have mounted since March last year.
“Our sense is that those insolvency numbers will start to tick up from September onwards,” Fennell observes. “There is a growing feeling that there could be a lot of companies in trouble. You are going to have companies that do not have a reasonable prospect of survival.”
From that point on, he predicts, Government, policy makers and, most importantly, businesses themselves, are going to face tough decisions – who to support into the long-term and who to allow go under.
Fennell argues that supporting businesses that are not viable will only drain resources from those with long-term futures. “The last thing we want is to end up with, and I know it’s a horrible phrase, is zombie companies, that are going to take capital away from viable companies in order to be kept alive,” he warns.
We are going to hear the term "reasonable prospect of survival", borrowed from examinership, the court-supervised corporate rescue mechanism, a lot over coming months. The Company Law Reform Group has put forward proposals for saving troubled, but ultimately viable, small businesses, that uses the same definition.
Legislation
Fennell hopes the Oireachtas will pass this legislation on time to deal with the coming fallout. The system cuts out the need for multiple, expensive, court hearings by allowing company directors to appoint insolvency experts who then work on a rescue plan with creditors.
It puts a formal shape on something that Fennell says many companies will have to do if they are to survive. That is to involve a third party with no direct interest in the business or that of its creditors to aid all sides in reaching a solution.
“It will be about managing the competing outcomes that people want from the situation and getting them to agree that in the end, everyone is going to take a bit of pain. It’s trying to get these different stakeholders into that mindset, that’s the big challenge.”
Some businesses are already taking steps in this direction, he adds, arguing that the sooner people act, the less pain there is likely to be. “Now is the time I would be looking at doing restructuring,” he counsels.
Businesses will have to ask themselves if they can claw back the losses of the past year. They will also have to assess what is likely to happen in the future, Fennell notes. “You are going to have to ask is the demand going to be there over the longer term for your business to be a viable business,” he says. “Hope isn’t a strategy.”
Aviation, shops and hospitality are likely to take much of the pain, while he suggests that offices, too, face a period of uncertainty. Pharmaceuticals, one of the Republic’s leading export industries, and technology, are likely to be unaffected. “But they cannot make up for the job losses.”
Variables
Consumer spending is the big variable. Irish households saved an extra €13 billion last year. “A big question is what is going to happen with the money that people have saved,” he says. “Will there be a big spend for a couple of months, and then will people hold some of it back because of uncertainty? Or people could be very selective in what they are going to spend it on. That’s going to have a huge impact on what the recovery is going to look like.”
Evidence so far from the UK suggests a bounce in spending as people emerge from lockdown. Economists predict that Irish people could blow around half the money they have squirrelled away.
Fennell speculates that people could return to the high streets and spend for a period before easing off. That step back could coincide with the Government winding down its supports. “So when do you hit that wall? When does the spending stop and Government support end?”
UK experience also shows prices going up as businesses respond to demand and try to recoup some of the last year’s losses. That risks inflation, which in turn could prompt a rise in interest rates. “That starts to point at a totally different dynamic,” he says, warning that increased borrowing costs could result in fewer viable businesses.
Vaccination is another variable that could influence how all this plays out. “The Government will be able to do more opening up the more people are vaccinated,” Fennell acknowledges, noting that once people are “out and about” they will start spending more.
Further evidence of Covid's impact on retailing emerged this week when Carphone Warehouse announced that it was pulling out of the Republic with the loss of just under 500 jobs. Last year, the High Court appointed Fennell liquidator of Arcadia, owner of Topshop and Miss Selfridges, when its UK parent went into administration. The chain's 490 workers were made permanently redundant in January, although he hopes some of those jobs can be saved. The chain's brands were sold but not the physical businesses.
Fennell believes there is more to come, as in common with many others, he feels that Covid restrictions have sped up the shift to online shopping, leaving high streets facing an uncertain future. “People will still want to go shopping but the amount of bricks and mortar that these retailers have is just too much,” he argues.
On this basis, big, mid-market chains with a lot of outlets look the most vulnerable, he says. “They are the ones that are going to struggle, if you are in high-end or low-end retail, you are in a much better position. If you look at what’s folded, it has been the multiples.”
Aviation
Air travel has also produced its share of pandemic victims. Airlines Norwegian Air Shuttle and CityJet and aircraft lessor Nordic Aviation Capital, all sought High Court protection last year in separate corporate rescue exercises. Fennell wrote the independent expert's report used to back Oslo-based Norwegian Air's examinership bid.
That company's examiner, Kieran Wallace of KPMG, subsequently agreed a rescue plan or "scheme of arrangement" with creditors that involved Norwegian cutting its fleet to 53 jets from 140. It is raising €590 million from investors. The airline chose the Republic's High Court to oversee its rescue as its aircraft were leased through companies based here.
Ongoing restrictions, with a likely slow return to 2019 levels of air travel, have left the world with a glut of aircraft, particularly those used for long-haul flying, which faces a longer period of recovery. That could mean further airline failures or restructuring. “Twenty-three airlines around the world have gone into some kind of process since last year,” Fennell remarks.
Aircraft leasing, responsible for up to 5,000 jobs in the Republic, which is a major centre for this business, also faces a shake-out. In January, Fennell predicted that bigger, well capitalised players would survive, while there was likely to be widespread consolidation.
Within the past few weeks, Dublin-based Aercap announced that it was buying rival GE Capital Aviation Services in a €25 billion deal, to create the biggest company of its kind in the world, with more than 2,000 planes and 300 helicopters.
Subsequently, another Irish company Fly Leasing, announced that private equity player Carlyle was buying its business to merge it with an existing aviation finance arm. That deal was driven by the fact that private equity funds have large amounts of cash they are looking to invest. Fennell forecasts that this could be a feature of the leasing business in the near term.
Tourism
Air travel of course means tourists. Its problems, allied to the Republic’s own very tight restrictions, are likely to leave the tourism industry facing a second summer season without foreign visitors. Similarly, Fennell argues that business travel is likely to be very limited for some time to come.
Initiatives such as the EU’s revised traffic light system, which favours testing over quarantines, could help. “But international travel is still going to be a bit of a mess over the medium term, until vaccines are rolled out globally,” he says.
Covid aside, the High Court appointed Fennell and his colleague James Anderson as liquidators to Wirecard UK and Ireland, the Irish-registered arm of the German payments company now at the centre of fraud investigations in its home country and here. The firm collapsed last year when it emerged that €1.9 billion was missing.
Their role is to realise any assets and distribute them to creditors. Fennell says that there is huge interplay between what is happening here and in Germany. "It is not something that is going to be dealt with quickly, it's very complex," he says. The Garda National Economic Crime Bureau is investigating some of the company's dealings here.
Fennell has been working in company restructuring since the 1980s "when interest rates were in the low 20s and unemployment was in the high teens". In the late 1990s, he and Tom Kavanagh founded specialist insolvency and corporate restructuring business, Kavanagh Fennell.
In 2014, it merged with Deloitte, the founders, partner David Van Dessel and more than 50 staff joined the bigger firm's corporate finance division. "It was a great move for us and for them," Fennell says. "It gave us the brand recognition and strength, and it gave them a team of 50 specialists."
Fennell has worked through the “dark days” of the 1980s, the Irish economy’s subsequent Celtic Tiger growth, the financial crash, and now Covid-19. “This will play out differently, as they all play out differently,” he says.
