How corporates can address their post-pandemic balance sheets
Amid the pandemic, UK corporates received a stream of government enforced credit support to stabilise and support businesses. As the time to repay this approaches, Martin Gray, a Managing Director at Kroll, has advised businesses to maintain clear communications with stakeholders and contemplate plans for restructuring their businesses.
The effects of the coronavirus recession pushed businesses across the UK to the brink of collapse – threatening huge losses in asset value and jobs. Throughout the past year, the worst possible impacts of this situation have been offset, with UK corporates being supported with state initiatives during the height of the Covid-19 pandemic. According to Gray, who is a Managing Director in Kroll’s restructuring advisory practice, most of that available support was through debt products, something which may be about to place new pressures on businesses as the country ends its lockdown measures.
Gray explained, “The consequence of the various initiatives that have been provided since the outset of the pandemic has ultimately led to a substantial increase in the level of liabilities on the balance sheets of UK corporates. This necessary liquidity has largely been obtained through extending credit lines with HMRC, suppliers, landlords and increased bank borrowing. All of which must be repaid by businesses over a relatively short period of time and at a point when there remains an inherent level of uncertainty over the outlook of the market.”
In most circumstances, the amount of current liabilities has disproportionately increased to a point where the level of support from these stakeholders “has been maximised,” while they expect those liability levels to decrease again “within a relatively short period of time.” Realistically in the current state of things, however, this may not be possible for most corporates “depending on the sector, liquidity status and profitability levels.”
As the time for repaying debts approaches, then, Gray asserted that it is now “critical” for corporates to maintain regular communication with key stakeholders. By doing this, they can ensure they all remain informed and supportive of the direction being taken, at a time when stakeholders losing patience could spell ruin for companies. At the same time, directors need to use this window of time productively, to weigh up what comes next.
“It is imperative that directors proactively plan for the challenges ahead as they navigate their way out the other side of the Covid-19 pandemic,” Gray went on. “As they do so it is important to consider the make-up of their balance sheet, how it has evolved over the past 12 months and what actions need to be taken to address that imbalance… Where necessary, directors should consider the options available to restructure the balance sheet to become more aligned to the cash flow needs of the business. This may include reducing or normalising their current liabilities with a more manageable longer-term debt solution.”
There are multiple routes to find such a solution, according to the Kroll expert. This could include traditional sources of finance or a recapitalisation through equity means. However, in certain circumstances neither of these options may be available or deemed suitable. In these cases, the UK Government has announced a new Recovery Loan Scheme – supporting borrowing of up to £10 million for individual businesses and up to £30 million across a group. As firms look to recover from the uncertainty of the pandemic, and manage their debts, the use of these proceeds could include cash flow management, growth, and investment.
Concluding, Gray said, “Kroll therefore recommends that directors complete a critical assessment of their business to ensure timely and appropriate action is taken to create a stable platform to financially support and safeguard the longevity of their business.”
Boasting 5,000 professionals across 30 countries, Kroll is one of the globe’s largest consulting networks. The organisation supports clients across the areas of corporate finance, mergers and acquisitions, restructuring, legal and business solutions, data analytics and regulatory compliance.
