Debt & Insolvency

Private debt lending has grown significantly since 2008 and is becoming an increasingly “valuable” source of finance for smaller businesses, a major study has revealed.

Research published by the British Business Bank in collaboration with the British Private Equity and Venture Capital Association (BVCA) shows that over £18 billion of private debt lending took place between 2018 and 2019.

Private debt is defined as any debt held by or extended to privately held companies and usually involves non-bank lenders making loans to companies with bespoke requirements or a need for greater flexibility in terms of financing structure.

According to the UK Private Debt Research Report, private debt is “often the only or most viable funding solution for smaller businesses and mid-cap firms” and may prove to be “particularly suitable for companies coming out of the Covid-19 downturn with a growing need for investment”.

Across £18.4 billion of lending in 2018/19, the research shows that 62 per cent of deals were considered “growth transactions” and were used to upscale or expand existing operations. The average size of each growth transaction was £2.2 billion, meaning over £1 billion of debt lending was used to grow small businesses.

The report, which uses data from the 55 biggest funds, also reveals that four in five (82 per cent) deals took place outside of London, with strong regional demand for private debt finance in the North West and Yorkshire and The Humber.

By sector, the manufacturing industry represents the largest number of deals by volume (19 per cent), followed by information and communication (16 per cent), and professional, scientific and technical activities (13 per cent).

Commenting on the figures, Catherine Lewis La Torre, Chief Executive Officer of the British Business Bank, said: “In a relatively short period of time, private debt has established a position as a viable type of funding for the UK’s smaller businesses at different stages of development.

“As the focus shifts from stabilisation to economic recovery, supporting business growth will be a fundamental driver of a thriving post-Covid-19 UK economy. Ensuring that businesses can access the funding best suited to their needs will be vitally important in the coming years and private debt has an important role to play.”

BJ Chong, a Director with Palmers Solicitors, who specialises in corporate finance, said: “This latest research underlines the fact that there are many finance options open to SMEs, particularly those who are looking for outside investment to help sustain their businesses during the current Covid-19 economic difficulties.

“Our team of corporate finance experts have the experience required to lead business owners through the investment process and can help advise on the most beneficial arrangements.”

For advice and support with all aspects of corporate finance, please contact us.

A new study by insolvency trade body R3 has found that 93.7 per cent of practitioners expect a higher number of corporate insolvencies in the next 12 months, with 56.1 per cent saying they expected a ‘significantly higher’ number of cases and action. This would seem to be at odds with the statistics from the Insolvency Service for April, May and June, which show that the number of insolvencies is down respectively by 17, 30 and 50 per cent compared to the same months last year.

However many insolvency experts believe that the reduction of Government support in the coming months, combined with the end of the temporary suspension of statutory demands and winding up petitions means that a sharp rise in business failures could be just around the corner.

This suspension has been in place since 23 April following an announcement by the Government that it would suspend actions against struggling businesses. This has since been codified and built upon in the Corporate Governance and Insolvency Act 2020, which backdated the suspension from 1 March onward.

Former president of R3 Duncan Swift says most companies have not been abusing the suspension period. He said: “[The suspension] is a fairly blunt instrument to prevent unwarranted enforcement action that has a risk of being abused by businesses. In my experience, the vast majorities of UK corporates and their boards of directors are navigating the pandemic crisis with a straight back.”

The temporary suspension outlined in the Act will end on 30 September, unless the Government decides to extend it until March 2021. This would mean that courts, which are likely to be also dealing with other claims, such as evictions and repossessions, will not start hearing creditor petitions and demands until 1 October. Of course, many creditors cannot afford to wait for the courts to reopen and are instead renegotiating contracts and terms of payment with debtors.

According to Duncan Swift, it is likely to be the third and fourth quarter of 2020 that is most critical as most projections in a single ‘hit’ scenario see a large pickup in the UK economy during the second half of the year. He added that most insolvencies do not tend to occur at the bottom end of an economic cycle but rather during the recovery period.

“There are more formal insolvencies as you exit recession than going into one. During the recession companies and businesses are finding their way and trying to navigate through a low period,” added Swift.

“Coming out of the recession businesses begin to ‘accelerate’. They start to see demand restored to normal or in some cases higher level to what it was before. If you’re coming out of a recession, invariably the corporate as an entity has a weakened working capital position. They end up with a position of over trading where the company runs out of working capital trying to meet the restored or enhanced level of trade.”

If you or a client is concerned about a surge in insolvencies later this year and the impact it may have on their business then it is important that they seek professional legal advice at the earliest opportunity. To find out how our insolvency experts can help, please contact us. 

Britain should prepare its courts for a potential flood of insolvency cases in the coming months according to a leading international economist. Professor Randall Kroszner, a former member of the US Federal Reserve’s Board of Governors, has called on British policymakers to take a pragmatic approach to corporate insolvency to protect jobs and the economy.

Professor Kroszner, who held his position at the Federal Reserve during the last economic crisis, said that politicians should accept that a V-shaped recovery may not occur and should consider the impact of a slower and more difficult economic period. He said: “Everybody wants a V and if you have a V you don’t have to worry about widespread bankruptcy and restructuring. But we have to acknowledge that this might not be the case, so it’s important to be prepared for that and to minimise the damage.”

A relaxation of the insolvency rules could help to protect jobs and economic activity, according to Professor Kroszner. “Given the number of bankruptcies is likely to go up quite significantly, it can be better for the economy and better for the debt-holders to not [wind down the business] and to do a restructuring that maintains employment,” he said.

“You won’t have the same liquidation and everyone being turned out of work. You can say, ‘OK, there’s a solid operation here with a high debt, so we want to restructure the debt burden but we want to maintain the underlying economic activity.’ That’s good for the economy, good for the workers and good for the bond-holders.”

The UK has already taken action to reform the insolvency system in response to the pandemic by introducing the Corporate Governance and Insolvency Act 2020. Under this new legislation, the UK has suspended laws on wrongful trading, allowing directors to keep technically insolvent companies open during the pandemic without fear of legal action.

It also introduced a new company moratorium to give businesses more breathing space from creditors to help companies to restructure without the need for more formal insolvency procedures.

Professor Kroszner said that more countries, including the UK, needed to adopt something akin to US Chapter 11 proceedings. These allow businesses to operate while paying creditors through a restructured payment plan and for directors to continue to run the business. Elements of Chapter 11 are somewhat mirrored in the new company moratorium, in particular the ability for directors to maintain control of the business, but it does not include all of the benefits available to companies in the US.

However, even in the US, there have been recent issues with Chapter 11 filings after proceedings soared by 48 per cent in May leading many experts to warn of potential delays, which could force businesses into premature liquidation. Professor Kroszner said that British courts would face similar challenges.

He said: “Having a very effective and efficient bankruptcy, where you have expedited bankruptcies and sufficient resources in the legal system, is very important.”

If you or a client requires advice on insolvency rules and legal procedures our experienced team are here to help. To find out how we can assist you, please contact us.