UK: Restructuring & Recovery Quarterly Bulletin, Summer 2008 - Global Reach

Last Updated: 4 September 2008
Article by Anthony Spicer

Smith & Williamson is undergoing a period of expansion, with our Restructuring & Recovery Services division announcing its presence in North America and Central Europe.


Spotlight on Smith & Williamson's Expansion

Welcome to the summer issue of our quarterly bulletin brought to you by Smith & Williamson's Restructuring & Recovery Services team.

We publish the summer issue of our quarterly bulletin Restructuring & Recovery following a period of growth for Smith & Williamson. We are delighted to announce a joint venture with CRG Partners, a US firm specialising in operational and financial restructuring services. CRG Partners has eight offices across North Americaand our joint venture with them will also enhance our restructuring and recovery presence in the Cayman Islands and British Virgin Islands.

Smith & Williamson has also expanded its presence in Ireland following a merger with Dublin-based Oliver Freaney & Company. Founded in 1958, Oliver Freaney is a highly respected provider of accountancy, tax and business advisory services, including corporate recovery services, to entrepreneurs and their businesses. It has extensive experience in creating financial and business solutions for clients across all sectors.

In this issue we look at the continuing downturn in the property market. A recent survey by the Royal Institute of Chartered Surveyors (RICS) reveals that demand for commercial property has fallen at its fastest pace for over six years and to its lowest level in eight years, with the retail sector showing the greatest decline. According to RICS, the financial turmoil is impacting on decision making in the business community, with many re-evaluating their need for commercial property space. In light of these findings, Richard Stanley of DTZ provides his view of the property market from a surveyor's perspective.

Also, we profile Barry Knight, who joined our Restructuring & Recovery Services team as a director earlier this year. He brings a wealth of experience and adds considerably to our expertise in the retail sector. Finally, we look at how to protect the value of leased premises using an administration procedure.

As always, we hope you find our articles interesting and informative and we welcome your feedback.


Artice by Stephen Cork

Stephen Cork discusses the benefits of Smith & Williamson's presence in North America and Central Europe.

Smith & Williamson's Restructuring & Recovery Services team further strengthened its international presence when it established a joint venture with CRG Partners, a leading turnaround and restructuring services firm, in April this year.

Headquartered in New York, CRG Partners has seven other offices in the US – Atlanta, Bethesda, Boston, Charlotte, Chicago, Dallas and Los Angeles – as well as an office in Vienna. The company was formed in July 2007 through the amalgamation of leading firms TRG (The Recovery Group, Inc.) and CRP (Corporate Revitalization Partners, LLC). Today, CRG Partners is one of the largest turnaround and crisis management firms in the US.

Smith & Williamson's Restructuring & Recovery Services team is enthusiastic about the opportunities arising from this joint venture. It will enable us to increase substantially our access to North American resources and further our ability to serve our clients with a broader array of consulting services.

In fact, Michael Epstein, a managing partner at CRG Partners, is already experiencing an increase in workload as a result of the US sub-prime crisis. He has welcomed access to Smith & Williamson's expertise stating that CRG Partners will continue to meet the ever-increasing demand of its North American clients with overseas activities, as well as those of its European-based clients.

Smith & Williamson has recently expanded into the Caribbean, with offices in the Cayman Islands and the British Virgin Islands. Smith & Williamson and CRG Partners will together be able to offer a comprehensive suite of restructuring services including turnaround consulting, interim management, crisis management, performance improvement, and financial restructuring and advisory services from Europe to the US.


Article by Richard Stanley

Richard Stanley of DTZ assesses the state of the commercial property market.

The commercial property market has experienced a tough six months, with this trend expected to continue into 2009. Investment yields have moved out by as much as 2.5% in some sectors, affecting the capital value of property by as much as 25%. Earlier in the year we had envisaged the Bank of England following the Federal Bank and dropping interest rates further in an attempt to reinvigorate the economy. However, current inflationary pressures make this unlikely in the short term and any suggestion of market sentiment improving in the present environment appears purely speculative.

Unfortunately the market is in stagflation, with few investment deals surviving the banks' credit committees. Deal volume was in excess of £22bn in the fourth quarter of 2006 compared to under £3bn in the same period the following year. With few comparables available to value property assets, has the market truly re-priced?

Developer difficulties

From a development perspective the market slowdown could not have come at a worse time. Developers have been dealt a cruel double whammy, with waning market sentiment squeezing margins and tender prices for construction work expected to rise much faster than inflation (and little if any capital growth inflation in the short term).

The effect of this is most visible in the regions, where we have seen evidence of sales and capital values collapsing – in some cases by as much as 30% – on certain apartment schemes. Developers are now offering investors incentives to allow securitised ownership of schemes, funded, as always, on the back of ever-hopeful rental demand.

With minimal capital growth and rising development costs, developers may be looking for increased funding from banks. The reality is that plummeting loan-tovalue ratios and general market illiquidity mean this option has almost certainly been extinguished.

Winners and losers

So who will be the winners and losers in these troubled times?

The winners, as always, will be those who plan well, hold good credit history and are able to control their build costs in a stressed market. The failures will be those who do not – and it must be broadly recognised that lenders share ownership of this problem.

Challenges ahead

We have often advised in situations where lending has been structured on fixed cost and forecast capital growth. The challenge now will be to advise banks on their options where poor cost control and stagnating capital values mean lack of appetite for further funding. This is set against a backdrop of minimal values for part-built schemes and the potential for substantial write-offs.

DTZ is a global property service provider with over 12,000 people operating out of 45 countries worldwide.


Article by Anthony Spicer

With the much-anticipated economic downturn arguably a reality, Anthony Spicer looks at the options available to lenders in today's tough property market.

In his article, Richard Stanley of DTZ outlines the challenges plaguing the commercial property market and finds little hope for improvement in the short to medium term. A point worth emphasising is that lenders face substantial write-offs and it is unlikely that a strategy of an immediate sale at the best price will be attractive in many circumstances.

Common problems

Some of the widespread issues in the current property market include:

  • incomplete residential developments with projected sale values significantly lower than original expectations

  • small, owner-managed property companies with negligible cashflow and illiquid assets unable to meet construction costs and interest payments

  • land banks with planning consents but doubtful economic development potential in the short to medium term

  • related services, such as struggling estate agencies and contractors.

Decision time for lenders

Lenders are facing insolvency issues not encountered in the property market for years. Add to this the growth in the buyto- let market, which was negligible at the time of the last recession but now accounts for some 20% of UK mortgages, and we have a whole new set of challenges.

Lenders must decide whether to restructure debt, agree sales in the short term or warehouse distressed assets – perhaps in conjunction with joint venture partners – until market conditions begin to improve.

Step up the insolvency Practitioner

Insolvency practitioners have an important role to play in terms of advising on and implementing strategies, which may include formal insolvency procedures.

The range of problems in today's market makes it difficult to generalise. However, it is clear that insolvency professionals working in conjunction with property agents, contractors and other property specialists will need to devise inventive solutions to help lenders deal with their current problems – and those that will no doubt arise in the coming months.


Smith & Williamson appoints retail advisory and restructuring specialist

Article by Barry Knight

Barry knight outlines his career to date and explains why he joined smith & williamson.

I began my 20-year career in retail and consumer-related business at the Burton Group, where I specialised in restructuring and turnaround. I was involved in operational restructuring, as well as two emergency rights issues following the company's over expansion into retail park development.

After working on the refinancing of the Mirror Group following the Maxwell pension fraud, I joined Sears and became part of the team that restructured the group. This included carrying out the Selfridges flotation and subsequently advising on its expansion across the UK, the sale/closure of the British Shoe Corporation, and disposal of the Sears store card operation. Following the takeover of Sears, I went on to work for the Barclay Brothers and Sir Philip Green, orchestrating the Adams Childrenswear management buy-out.

Then, as deputy finance director of Coats Viyella, I was involved in the break up of the Viyella division, as well as becoming acting chief financial officer (CFO) of Jaeger after a cash and accounting fraud was discovered. I left to join Boots and had responsibility for the change management programme. During this period, Boots exited Wellbeing (primarily botox and chiropody) and began reinvesting in the store portfolio off the back of the new 'health and beauty' marketing campaign.

However, despite being offered the position of deputy CFO at Boots, the lure of restructuring proved too great and I went on to join the turnaround team at MyTravel. Here, I helped refocus the business by introducing new retail business models and reporting structures. Following the successful restructuring of MyTravel, I worked for retail restructuring specialists Hilco, closing down Littlewoods Stores before becoming commercial director of specialist store closure and stock clearance firm Gordon Brothers. I subsequently worked as an independent adviser, setting up a store chain and restructuring both Hawkshead (the outdoor clothing retailer) and Ronit Zilkha (Princess Diana's favourite designer) through insolvency processes.

Attracted by the entrepreneurial culture of Smith and Williamson and the high profile of the Restructuring & Recovery Services department, I am delighted to have joined the firm earlier this year as a sector specialist covering the retail, wholesale and consumer products industries. I am currently working as an interim turnaround manager for a mini conglomerate selling a clothing wholesale business out of administration and I am closing ten Photo Optix (camera retailer) stores.

So far it has been an enjoyable introduction to Smith & Williamson, working with not just the Restructuring & Recovery Services team, but also the Corporate Finance and Transactional Services departments. It has been well documented that there are troubled times ahead for the retail sector, so I am expecting to be very busy!


Article by Greg Palfrey

Greg Palfrey explains how to unlock the value in insolvent hospitality businesses.

Increasing numbers of small or even single unit pubs, clubs and hotel groups are facing operating difficulties and a cashflow crisis. Many of these businesses operate from leased premises and, after refurbishment, borrowers can find themselves at the limit of their facilities with precious little cash available to fund working capital.

Trouble brewing

A disappointing number of these businesses fail due to a combination of operating and financial mismanagement. Constant attention to margins is crucial yet some proprietors have scant knowledge of the margins in wet or dry sales and the industry indicators they should be achieving.

This is usually compounded by a failure to provide lenders with timely information so that when crisis point is reached, there is no flexibility within the facility to buy time for a review and analysis of the options. With the brewery withholding supplies and the landlord knocking on the door, proprietors often feel there is no option other than to return the keys and await the consequences of their failure.

Assessing the situation

In such circumstances, appointing an administrator may seem unjustified due to the likely lack of trading or the prohibitive expense when compared with the costs of liquidation – especially if the lender already has recourse to personal guarantees and the matrimonial home. However, filing a notice of intention to appoint can prevent the landlord from repossessing and allow time to assess the options for trading and an orderly sale of the business and/or an assignment of the lease to realise value. The emphasis when filing such a notice is to give prospective appointees the chance to see whether the business is worth saving. There is no obligation to proceed with an appointment if the review concludes that closure and subsequent liquidation is in the best interests of the creditors.

A realistic assessment of the position taking account of valuation, development potential, type of trade, location, seasonality and actual/potential profitability can usually be made well within any moratorium period. We work closely with a number of agents who specialise in operational matters and who, when working with the benefit of a moratorium, have access to suppliers at short notice in order to recommence trading.

Securing buy-in

A decision to trade on will need the agreement of the lender, who may be asked to fund a further overdraft facility. Co-operation from the principals and key staff is desirable, although it may not be essential where specialist staff can be recruited at short notice to manage entire operations.

Knowing the risks

Administration is not without its risks. Administrators must move quickly to secure the necessary licences and, of course, the bleak outlook for many pubs and clubs presents its own set of challenges. However, at Smith & Williamson, we understand the issues and work with the relevant parties in a diplomatic, effective way to unlock value and reach the best solution possible for all stakeholders.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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