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Ireland – SME restructuring
in Ireland
by Declan McDonald and Ken Tyrrell, PwC Ireland
The numbers are hard to ignore: (i) 99.8% of all enterprises in Ireland are
SMEs; (ii) 70% of private sector employment in Ireland is provided by SMEs;
and (iii) 60% of Ireland's enterprises are non-export indigenous businesses.
The figures are similar to other EU averages and the European
Commission sees SMEs as “the true back-bone of the European economy,
being primarily responsible for wealth and economic growth, next to their key
role in innovation and R&D”. While property has dominated the Irish
restructuring and insolvency landscape since 2007, the spotlight is now
firmly on the SME sector as many businesses find themselves at tipping
point, and require financial restructuring solutions to address over
leveraged balance sheets.
The IMF/EU team has asked the Central Bank to use a
new set of “tools” to explore the trends on SME loan
books, which amount to almost €35bn; and the Central
Bank is now pressing banks to decisively tackle debt
overhang on SME loans in an effort to boost economic
recovery and prevent contagion of SME business
failures to mortgage, buy-to-let and corporate real
estate loan books. Over the past few months, we have
seen an increased demand for adequate restructuring
solutions for SMEs, with banks reacting with advanced
restructuring methods including warehousing nonperforming debt, debt reduction in certain cases, debt
for equity swaps and accelerated sales processes.
In this article we consider the emerging
restructuring trends for SMEs, with a particular focus
on the retail sector.
SME restructuring landscape in
Ireland – emerging trends
Borrower fatigue has set in
As the restructuring focus has predominantly been on
property in Ireland for the past few years, some trading
businesses are suffering from “borrower fatigue”. In many
cases borrowers have managed their businesses well
under challenging circumstances but with limited financial
restructuring solutions available to address over-leveraged
positions. The Troika and Central Bank are now firmly
pushing the restructuring agenda for SMEs, and financial
institutions are developing a suite of restructuring and
debt management solutions for SME loan books.
Advanced restructuring solutions and experienced
professionals will be needed to counter the effects of
borrower fatigue.
Slow, slow, quick
As restructuring professionals are only too aware, while
a property may decline in value, you will generally
retain ownership of some real estate which will always
have a value. However with trading businesses, when
things start to go wrong, the loss of enterprise value in
a trading business can happen very quickly, in some
cases measured in weeks or possibly days. In
exceptional cases, the enterprise value can evaporate.
The diagram in Figure 1 reflects this point and the fact
that options to recover value can reduce very quickly
once a downward cycle has started.
The decline of trading businesses can take place in
stages and typically can seem to be slow...slow...quick
(e.g. creditor pressure, breach of lender covenants).
Decisions generally need to be made very quickly and
acted upon decisively in order to preserve value in
the trading business.
Independent business reviews being used as a
building block
Independent business reviews are a key link in the
restructuring process and we are seeing an increased
level of requests from banks for business reviews.
Independent business review can improve
communication channels with borrowers in
circumstances where there has not been a high level
of interaction in recent years.
Interestingly, restructuring proposals are increasingly
being submitted by debtors. This is triggering banks
into action in commissioning an investigative
accountant to review the business and provide an
independent assessment of the restructuring
proposals. Well structured proposals from debtors are
a welcome addition to the market and may lead to a
more positive engagement between the bank and the
debtor. However in certain cases debtors are
submitting some rather exotic restructuring proposals
to banks that simply aren’t workable or aligned to an
individual bank’s suite of restructuring solutions.
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Figure 1: Business decline curve
Value
Restructuring options
Independent Business
Reviews
Business Decline
Consensual Restructuring
Corporate Insolvency
Examinership
Property Decline
Corporate Insolvency
Receivership/Pre-packs
Corporate Insolvency
Liquidation
Time
“Examinership Lite” – a formal restructuring
answer
Examinership is a process which provides a company
with a period of court protection (maximum 100 days)
from its creditors, to facilitate a formal arrangement to
be put in place between the company and its creditors.
In an attempt to provide SMEs with improved
access to this restructuring option, in late 2012 a
proposal for what is colloquially being referred to as
“Examinership Lite” was included in the draft
Companies Consolidation Bill. This legislation
specifically targets micro enterprises/small businesses
with less than 50 employees and a balance sheet not
exceeding €4.4m or turnover not exceeding €8.8m.
The legislation, if enacted, will be a positive measure
for small companies and make it easier for viable SMEs
to restructure their debts, while giving proper
consideration to creditors. If however the legislation is
delayed or the process does not produce the desired
impact, plans for an out-of-court restructuring process
for SME trading businesses may be accelerated.
Complex restructures may need
a formal process
In addition to financial restructuring, business
re-organisations and more efficient tax and legal
structures may also need to be introduced. In Ireland,
many SMEs currently operate as sole traders or
partnerships. These trading structures were effective
vehicles through which SMEs availed of generous
property reliefs and capital allowances for investment in
various sectors. Restrictions introduced in the Finance
Acts of 2007 and 2010 have reduced the availability of
such reliefs and coupled with the expiry of other
available reliefs, may create circumstances where the
existing trading structure is no longer efficient for tax
purposes. We anticipate that SMEs will increasingly
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review and adjust their trading structures to ensure
profits, and ultimately cashflows available to service
bank debt, are subject to a reduced tax exposure.
In a lot of cases, Irish borrowers have exposures
to several banks in both a personal and corporate
capacity. This creates an understandably difficult dynamic
in a restructuring process. Banks exiting the Irish market
may be looking for a quick sale of the business, or
possibly a sale of the underlying loan, while domestic
banks that plan on continuing to trade in Ireland are
taking a longer term view to debt recovery through a
consensual restructuring process.
While consensual restructuring should always be the
default position to maximise value and recovery, formal
restructuring is inevitable in certain situations,
particularly in multi-bank cases and circumstances
where property debt overhang needs to be divorced
from the underlying trading business.
We have seen cases lately which have involved a
cocktail of formal processes to extract the trading
business from historic structures. Recently for example,
the ultimate sale of the Powerscourt Ritz Carlton hotel
resulted from a process which included examinership,
liquidation, receivership and a sale of debt; while the
restructure of Thomas Crosbie Holdings media group
involved a pre-pack receivership, examinership,
liquidation and fixed charge receivership.
What next for SMEs?
Generally, we anticipate that 2013/14 will see financial
institutions introducing a suite of consensual
restructuring options and strategies for SMEs in financial
difficulty. Given its inclusion as part of a much larger
piece of legislation, we believe the “Examinership Lite”
formal restructuring process may need to be
accelerated as a standalone piece of legislation or more
radically, we may even see the introduction of an out-
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of-court restructuring process for small businesses. With
an increased level of restructuring, we also see more
opportunities for investors in distressed businesses. The
Irish market now has active investors seeking to acquire
distressed businesses and recently, the National Pension
Reserve Fund setup three dedicated funds totalling
€850m with Better Capital, Carlyle Cardinal and
BlueBay Asset Management to provide equity, credit
and restructuring/recovery investment to the Irish SME
sector.
bankers raised obvious concerns over the impact on
capital values that a wholesale reduction in rents would
cause. A draft Bill was brought before the Dail in 2011
but after consideration and legal advice did not progress
on constitutional grounds.
Landlords and their bankers are now grappling with
a conundrum, whether to seek to rely on the covenant
in the lease, supported in some cases by a guarantee, or
participate in restructuring the retail sector by reducing
inflated rents for distressed tenants.
Focus on the Irish retail sector
Examinership being used to formally restructure
distressed retail businesses
Macro-economic indicators suggest that the Irish
economy is on a slow road to recovery or, at the very
least, the bottom of the recessionary cycle. The Central
Statistics Office has reported two consecutive years of
very modest GDP growth, and the National Treasury
Management Agency recently returned to the
international debt market with the successful sale of 10year bonds at an impressive yield of 4.15%. Yet the Irish
retail sector continues to face huge challenges brought
on by a sustained decline in sales volumes and inflexible
lease arrangements.
Many retailers are faced with an external
environment characterised by reduced disposable
income, rising unemployment, an increase in VAT and
other taxes, an austerity programme overseen by the
Irish Government; and are in some cases reporting
turnover reductions of 40% on peak levels. Retailers are
also faced with changing customer behaviours and a
requirement to restructure their business to develop a
robust a “click and brick” offering which combines a
physical store estate with a user friendly web portal.
All of which is set against a backdrop of stubbornly
high property costs, including commercial rates and
utilities, which have not reduced in line with turnover
reductions. Many retailers are bound by inflexible leases
which contain “upward only” rent review clauses, with
contractual rents now at levels far in excess of
comparable market rents.
“Upward only” rent review clauses causing
problems for retailers
The debate over “upward only” rent review clauses is
one that has been ongoing for some years. The Land
and Law Reform Conveyancing Act 2009 introduced a
prohibition on upward only rent review clauses in leases
created after February 28, 2010, with any lease entered
into after this date deemed to allow upward and
downward changes in rent. This development was
welcomed by retailers and commercial tenants generally
but brought little relief as it did not address leases
already in existence. The Irish government considered
legislating retrospectively to deal with this on the back of
strenuous lobbying from sectors of the commercial
tenant community. The landlord community and their
This landscape has now prompted some retailers to
look to examinership as a means of restructuring their
businesses. Property costs are reduced through the
repudiation or surrender of leases during the period of
court protection, with the resultant landlord damages
ranking as unsecured claims in a scheme of
arrangement. This will occur in circumstances where
sufficient rent reductions cannot be consensually
negotiated with landlords to render the business viable.
Section 20 of the Companies (Amendment) Act
1990 outlines circumstances in which the company in
examinership can repudiate certain contracts. A
Supreme Court ruling in December 2009 held that
leases are contracts that are capable of being
repudiated under Section 20. This has paved the way
for retailers to exit certain onerous leases during
examinership, providing a basis for a reasonable
prospect of survival of the overall entity.
Some recent examples
One of the first retail examinerships of note in this
regard was that of Bestseller Retail Ireland Limited. This
subsidiary of the Danish Bestseller Group, owner of
fashion brands Vero Moda, Jack Jones and Name It,
availed of court protection in 2010.
More recently, some other high profile Irish
retailers have followed the same route. In mid 2012, a
subsidiary of the Grafton plc group, Atlantic Home
Care Limited, which operates a chain of DIY stores,
sought court protection and entered examinership.
The DIY and home improvement market has been hit
particularly hard since the Irish property boom ended
so abruptly. Many of the large DIY retailers opened
new stores in regional retail parks, recently developed
to serve an expected nationwide demand for
property. In many instances these stores are now too
large or located in areas where insufficient demand
exists. In addition many of these retail parks are
subject to planning restrictions and are unable to be
converted to an alternative use. In its application for
court protection, Atlantic Home Care Limited
indicated that up to five stores would have to close if
the company were to survive. By the end of the
examinership just two stores had to close as sufficient
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rent reductions were achieved to secure investment
by a Grafton group company in a scheme of
arrangement. The company successfully exited
examinership in September 2012 having implemented
a restructuring that led to approximately a 45% saving
in property costs, returning the company to a break
even position and giving it a platform to return to
profitability.
In a similar move early in 2013 B&Q Ireland
Limited petitioned the Court for protection and at
the time of writing is going through the examinership
process. In its application for court protection the
company outlined that its turnover had fallen by
around a third from peak levels in 2008. Despite
numerous cost-cutting initiatives its rent roll remained
unsustainable and it hoped to renegotiate with its
landlords and close those stores which could not be
brought back to a positive contribution. In this case
the UK parent company, Kingfisher plc, offered its
support through the examinership and provided an
indication that it would invest in a scheme of
arrangement under certain conditions.
A more recent high profile name that entered
examinership in March 2013 is the high street ladies
fashion retailer Monsoon Accessorize Ireland Limited.
This is a subsidiary of Monsoon Accessorize Limited,
its UK-based parent. In its application for court
protection, an independent accountant advised that up
to 10 of the company’s 18 stores in the Republic of
Ireland may have to close in order for the company to
survive as a going concern. Its entire store estate is
unprofitable and a successful restructure may require
the closure of stores that are deemed non-strategic to
the business going forward. Similarly to B&Q, the
parent company has undertaken to support the
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business during the period of court protection and
invest in a survival plan and scheme of arrangement if
certain conditions are met.
Looking ahead for the retail sector...
The outcome of these cases will be watched carefully
by many others in the market place. In the absence of
retrospective legislation to deal with the rent problem
examinership is becoming the de facto process to deal
with what is a significant issue for many retailers in
various sectors. The profiles of these cases demonstrate
a common thread where an international parent
company will no longer fund the mounting losses but is
prepared to support the business in the long term if it
can be appropriately restructured. Having acted as the
examiner or reporting accountant in all the cases
mentioned in this article we are expecting the trend to
continue for 2013/14.
Authors:
Declan McDonald, Partner
Tel: +353 1 792 6092
Email: declan.mcdonald@ie.pwc.com
Ken Tyrrell, Director
Tel: +353 1 792 5184
Email: ken.tyrrell@ie.pwc.com
Corporate Restructuring and Insolvency
PwC Ireland
One Spencer Dock
North Wall Quay
Dublin 1
Ireland
Website: www.pwc.ie