A K-shaped recovery is likely as we emerge from the pandemic and its associated lockdowns. While government support measures have thus far played an important role in propping up businesses, the winding down of such schemes could result in a wave of defaults, causing strain for businesses and lenders alike. Yet the outlook for the next 18 months is positive thanks to new tech and business models fast-tracked by the pandemic.
This was the message from ABN AMRO Commercial Finance’s virtual round table, Be the phoenix: helping businesses thrive in the post-pandemic period. For one hour, speakers on the panel — which included Jeremy Harrison, Head of UK Sales at ABN AMRO Commercial Finance; Susan Elliott, Senior Manager at the British Business Bank; Louise Harvey, Director of Debt Advisory at Deloitte; and Andy Thompson, Head of Risk at ABN AMRO Asset Based Finance — discussed government support packages, what happens when they’re wound down and gave some predictions for 2022 and beyond.
A look back at lockdown
Businesses that have been quick to adapt have thrived, while many poor performers have been propped up by government support schemes.
For Susan Elliott at the British Business Bank, recovery has been a mixed bag. Tech, gaming software and life sciences have weathered the storm and are prospering, while there is increased pessimism in hospitality, leisure, perishables and their supply chains.
“Many financial support schemes were purely financial rather than business support,” she says. “As they are unwound, what replaces them? The Recovery Loan Scheme is designed to help businesses get back to normal, but the British Business Bank hasn’t yet seen a lot of take-up when compared to the Bounce Back Loan scheme.”
Louise Harvey at Deloitte says there is a lot of dry powder trying to find a home in a concentrated number of really good quality assets. “What that leads to is acquisition multiples going through the roof,” she says. “I looked at a transaction 18 months ago where they were discussing a price around the 14-15 times. A few months ago that business sold for a 30 times multiple.”
When asked how ABN AMRO Commercial Finance is approaching risk assessment when financing businesses, Andy Thompson said many traditional underwriting decisions remain important but that it’s increasingly vital to assess the quality of management teams. “In a disruptive environment, you don’t have the financial data for evaluating businesses,” he says. “It’s increasingly important to back management teams with a good track record.”
Beyond CBILS: what comes after government programmes?
The government has extended the moratorium on winding-up orders and evictions of non-payers of rent, which tells us a little about the government’s confidence in economic recovery, though the vast majority of measures are about to be concluded.
“The key word here is ‘tapering,’” says Jeremy Harrison. “When many of these support mechanisms were first introduced, we then had another lockdown, so you can never predict what’ll happen next. The Recovery Loan Scheme is part of that tapering effort… either businesses don’t feel they need it, which would indicate they are becoming self-supporting more quickly, or they do, and the scheme ensures they can operate on an even keel while the economy settles.”
In the absence of government support schemes, Harrison says this may prove an opportunity for private equity to step in.
Harvey warned that, “Covenant and loan defaults after Lehman’s took a good 12, 18 to 24 months to really kick in,” she explains. “Default rates haven’t really begun to tick up since March 2020, so the big question is: what’s about to follow in the next year?”
Thompson thinks cashflow issues could stem from disrupted supply lines causing a sharp demand on working capital. “The big question now is, what will happen when all that unwinds at the same time as there’s an uptick in consumption and trade? Although we have seen sales starting to pick up, what we’re seeing at the moment is still below what we would consider normal conditions. Asset-based lending should have lots of opportunities as we recover.”
The path to 2022
For Thompson there is an important need to be cautious. “There were around 5,000 fewer insolvencies in 2020 than you would expect in a normal year, so while the government support measures have been fantastic, they have also helped support businesses that would have probably gone bust,” he says. “Our key driver into 2022 is to be robust in our underwriting and onboard businesses where our money can be helpful.”
Elliott says some sectors seem optimistic about coming out of lockdown and the opportunities that new ways of work are presenting. She expects the adoption of technologies and new working arrangements to accelerate. Businesses tapping into new thinking on sustainability, mobility and business services, are positive. Others are looking out for a sustained uptick in consumer spending, too, with optimism about the speed of recovery.
If private equity funds are active and big multiples are being paid, it stands to reason that they are confident about 2022 and beyond. “A strong recovery is expected in some sectors, like FinTech or pharma, but what is interesting is a lot of sponsors are open to transactions that are cross border,” Harvey explains. “Thanks to Brexit, we’re doing more for folks who raise money at home and are looking to expose themselves to different geographies.”
Harrison has set big targets for next year. “Our industry has changed over the last 20 years, proving that it continues through any dislocation in the economy,” he explains. “Last year we were 170% ahead of where we were the year before. The big challenge we have is timing, with things taking longer for lots of different reasons, but demand for our product has never been higher.”
The panel concluded with some key thoughts and advice:
• By the close of 2022, we’ll have seen strong recovery, specifically around new technologies and working practices brought about by the pandemic.
• It’s integral we get the specific finance to fuel carbon reduction.
• All companies will need an ESG agenda, particularly if you’re seeking investment.
• Lenders must take a more holistic approach to business finance, which is something lenders need to capitalise on to truly deliver value to clients.
• Flexibility and adaptability, either in a business model or mindset, is going to be key to navigating to prospering in the years to come.
To find out more and watch the highlights from the event, CLICK HERE.