Friday 19 January 2018

Business of going out of business is booming

Receivership and liquidation are bad news for those companies affected, but good news for the insolvency squads, says Mark Keenan

It's been a stressful autumn for the 800 workers at Greenstar, the country's largest waste recycling company, who are still awaiting news of their future following the company's receivership two months ago.

The tender deadline for bids to find a new buyer came and went last month and now all eyes are on David Carson of Deloitte, one of a handful of Irish specialist insolvency professionals who are featuring regularly in the news of late thanks to the country's dire economic circumstances and the resulting record numbers of bank interventions.

Today it can seem like Ireland's insolvency squad is everywhere.

Aside from Mr Carson (he was also receiver for Waterford Wedgwood) the names we hear most include KPMG's Kieran Wallace (Superquinn, Bloxham, Mr Binman), Grant Thornton's Michael McAteer (Clerys, Quinn Insurance, Aer Arann, Treasury) and Paul McCann (The Burlington Hotel), Kavanagh Fennell's Tom Kavanagh (the O'Donnell and Fleming property empires) and Ken Fennell (Zoe, Callyx, Manor Park). All are making crucial daily decisions on the futures of Irish businesses, big and small.

This year will be remembered as the year of the receiver -- every day so far between one and three Irish companies went into insolvency with receiverships currently running at 250pc above what is considered normal. So far this year (q1 to q3 inclusive) there have been more than 1,282 insolvencies -- currently running at 6pc ahead of 2011's previous record total of 1,638.

With the business of going out of business having exploded in volume, the professional insolvency sector has likewise expanded. A sector dominated almost exclusively four years ago by a handful of specialist firms now has more than 20 companies offering specialist insolvency services.

An estimated average fee of €20,000 per job (a mean of the average amounts suggested by three leading insolvency practices) suggests that the non-personal insolvency sector's total fee income is now worth in the order of €32m per annum, up from about €12m four years ago.

Because insolvency skills are learned primarily through coalface experience -- almost by apprenticeship -- those accountancy firms with the longest established crews in their "recovery and reorganisation" or "restructuring" departments are the most sought after by lenders.

Industry sources say that the "big four" of Grant Thornton, Deloitte, KPMG and PricewaterhouseCoopers (PWC), will pick up around 75pc of the business this year, accounting for around €24m worth of fee income between them. These are closely followed by companies like FGS, Kavanagh Fennell, Ernst and Young, BDO and Mazars.

But while in-trays are overflowing, increased competition and slashed bank budgets mean the cash rewards, while still substantial, aren't as plentiful as they once were. The average fee has shrunk by 30pc to 40pc since 2008.

GT's Michael McAteer adds: "Today's levels of debt are simply huge in comparison to those experienced in the 1980s and this is what creates our biggest problem.

Then we were dealing mostly with manufacturing companies and you could always find a market for machines, lathes and drills. Previously assets were moveable and saleable. Now what's mostly going bust is the building -- and you can't move that anywhere."

Additional pressure comes with the God's speed a good operator must utilise to be most effective. "Our job is to sell the business as quickly as possible because the prospects get worse for every day that it remains unsold," says Mr McAteer.

"Some traders take advantage by trying not to pay their bills, but you have to pursue each and every one. If you're selling to a trader and you want to sell to them again tomorrow, you're not going to want to hassle them.

"But if there's no prospect of a relationship going forward then you can chase them for every single penny -- in court if necessary. Otherwise word gets around that you can be taken advantage of."

"Our biggest challenge when we land is to make the people commercially aware and next to manage expectations which can often be too high," says Ken Fennell of Kavanagh Fennell. "There's often an expectation that something will fix itself without actually being fixed."

Mr Fennell says attitudes to receiverships have changed. "Certainly there's not as much shame associated with it, probably in part due to the extensive coverage devoted recently to personal insolvency. It will always be difficult for a trader, particularly say in a small town, to walk around bumping into his creditors.

"But in the current situation there's a strong sense among the creditors that they could be the victim in the process the next time around."

High stakes receivership cases like Target and Greenstar have also brought what Kieran Wallace of KPMG describes as one of the "least welcome aspects of the job at the moment" -- the public spotlight which most insolvency practitioners aren't used to.

Today's insolvency practitioner has to be a black belt accountant with an ability to speed read numbers, a debt collector, a parachuted CEO, sometime salesmen, wheeler dealer and a skilled labour relations negotiator, especially when pension funds are at stake.

Kieran Wallace adds: "Essentially we're accountants -- most of us have accountancy backgrounds. You have to be interested in the workings of business, you have to be commercially minded, you need a thick skin and you have to be an optimist.

"It's a solution driven job which has problem solving at the fore. I think the tough and aggressive side of the job is somewhat overplayed in the media. We're essentially driven by the satisfaction of saving jobs where we can do it."

Despite the often terminal aspects of their business most cite "saving jobs" as their motivation.

Ireland's insolvency squad is also fast reshuffling to address the two biggest changes to occur in the business this year: first, the shift in the focus of the banks from property and construction to trading companies, including retailers, which are increasingly troubled and most likely to provide the receiver's bread and butter going forward.

Second is the emergence this year -- for the first time since the recession began -- of cash rich buyers for insolvency hit businesses and dissolved assets. Opportunists from home and abroad are coming out of the woodwork to hoover up the choicer trimmings from corporate shearings.

"A year to eighteen months ago there were no buyers out there. Now you have companies like Kennedy Wilson, various UK and US private equity companies and hedge funds or even some very wealthy individuals like the Russian lady who bought the Morrison Hotel," says Mr McAteer.

"We're certainly not swimming in buyers, but there's enough of them around now to make a difference.

"Bank deposits have never been higher. Remember that for every developer who paid €10m for a plot of land during the boom, someone else got €10m to stick in their bank account. Some of those people blew that money but plenty of them salted it away.

"Those who were glad of 0.5pc on deposit a couple of years ago are now thinking that's a bad deal. With the perception that the country's already hit the bottom, their appetite for risk is increasing. And you can see why -- we're seeing blocks of apartments out there turning in yields of 10pc -- this is pretty attractive stuff.

He says the buyer's market over €20m is 90pc led by foreign interests; that Irish buyers feature in the €10m and €20m segment by a ratio of 60:40. Below €10m, the Irish dominate.

The insolvency squad are unified in a resolute belief that business failure is not only necessary, but desirable for the greater common good.

"Sick companies ultimately contaminate healthy companies -- and then they bring them down with them," says Mr Wallace. "It's always horrible to see jobs being lost but failure is a natural course of events at this point in the economic cycle."

The terminally wounded become desperate and will embark on unfeasible undercutting of their healthier competitors, in turn inflicting harm on them. An example is those survivors of the hotel sector wipeout who blame Nama sustained operations for undermining them with unsustainably low room rates.

Ken Fennell adds: "Failure is a part of capital entrepreneurship and a necessary part of it at that. The average company today will never survive in its current format -- to continue do what it is currently set up to do. The key asset to any business is the ability of its managers to spot change quickly and to act on it.

"Through the boom we overtraded, which is as bad as under trading. You had an electrical contractor with three or four people suddenly finding himself with 50 people and all the costly bells and whistles that it entailed but with no plan B."

Given that our economic crash was largely property led, it was inevitable that the sector would be the first up for a clean out. It continues to comprise the biggest tranche of insolvencies, but this is now reducing.

The hotel sector, so often tied in with development, has also had much of its weaker players cut down. Now, as we enter year five of the recession, the trading companies are in focus.

Kieran Wallace says these are not at their most vulnerable at the bottom of the cycle, but rather at the beginning of the upturn.

"Step one is to strip out all unnecessary costs and a lot of trading businesses have already done that. Step two is to increase revenue, which a lot of companies have failed to do given the difficult trading circumstances.

"Now they have no cash and they're running out of runway. When a revival starts, a company like this hasn't got the resources to invest and take advantage and so it gets left behind. That's why we're seeing more trading companies going insolvent."

For his part, Grant Thornton's Michael McAteer asserts that the increase in insolvencies among trading companies is good news for the Irish economy overall.

"A lot of these receiverships haven't taken place yet because the banks had bigger debtors to deal with and because these trading companies might not have been saleable three years ago. The difference is that now there's a market. It underlines an economic improvement."

Despite the likelihood that 2012 will set a record for wind- ups, most of Ireland's insolvency squad remain optimistic that the corner had either been reached or has already been turned.

Grant Thornton's Mr McAteer adds: "I'd say it will be another 12 to 18 months before Ireland begins to grow again and this current cycle of receiverships has run its course."

Ken Fennell adds: "More companies going into receiverships today can either be saved or have some aspects of their operation emerge to trade again. The personal insolvency bill will see a movement into personal debt to some degree, although we're not yet sure how that will happen."

Fennell's statistics underline this levelling -- the 395 corporate insolvencies in the third quarter represent a 1pc increase on the same period last year. "The totals looked to have peaked."

So when the big bust eventually ends, will the insolvency experts find themselves out of business?

Mr McAteer adds: "Even in good times there are cycles within cycles. We had the dot com bomb of 2000, then in 2001 came foot and mouth disease."

Mr Fennell concludes: "In the booms there are substantially more start ups and thus substantially more failures. There will always be a need for a good receiver."

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