Baker Tilly Outlook 2010
Content
Outlook 2010
Still crystal ball gazing?
January 2010
Restructuring and Recovery
Real people, real solutions
A rocky road to recovery
In brief
• Recession formally ends • General election to determine the course of government tax measures • Rates of inflation, interest and growth all low in 2010 • More insolvencies, more unemployment likely
Commentators are saying that the recession is as good as over – but it may not feel like it.
Baker Tilly’s twice-yearly Finance Directors’ perceptions survey, published in November 2009, revealed that just over half of all respondents (54%) expected no improvement in trading conditions for their business over the next 12 months, while more than a further quarter (28%) expect trading conditions to worsen throughout 2010.
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2010 looks set to be a long, hard slog and there will be some more pain, in terms of additional insolvencies and further job losses, on what will undoubtedly be a rocky road to recovery.
Tracey Callaghan, Head of Restructuring and Recovery
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A premature optimism? Yet the Organisation for Economic Co-operation and Development (OECD) optimistically said in its November economic outlook: “The [UK] economy is set for recovery, supported by improving financial conditions, an expansionary monetary policy and stronger international growth. However, the pick-up will be slow with GDP projected to grow by slightly more than 1% in 2010, reflecting strong headwinds from balance sheet adjustments, a still weakening labour market and fiscal tightening.” It goes on to add that it will not be until 2011 that the recovery will “gain momentum” and then estimates that unemployment will reach 9.5%, although
inflation is likely to remain less than 2% and interest rates are also set to stay low. In early December, the Institute of Directors’ Chief Economist and Executive, Spencer Dale, was a little more upbeat: “The economy appears to have turned… We are likely to be moving into a period of renewed expansion”. He says that the weak sterling will give a boost to exports and now that companies have had an opportunity to reduce their inventories, they should be in better shape. He goes on to refer to how fragile such a recovery may be and that the Government should not pursue policies that may damage its nascent green shoots.
2 Outlook 2010
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Global factors will continue to impact on how fast the UK will emerge from this recession. Can we be competitive again or will we lose out to faster moving economies?
Geoff Carton-Kelly, Head of Special Investigations and Baker Tilly International contact partner
And that is what it has done, if you believe that good economic intentions underpin Alistair Darling’s Pre-Budget Report (PBR). There were no immediate significant tax rises. Yes – public sector cuts will follow. VAT returned to 17.5% from January 1. The overall thrust was continued support for the recovery.
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Easing the woes One of the big questions for 2010 is what will replace quantitative easing (QE), expected to be phased out in February, especially as the PBR made reference to £175 billion of additional debt-raising in the pipeline? And a second question – what will it ultimately cost the UK taxpayer? The Confederation of British Industry (CBI) was forthright in its criticism of the PBR: “There were two tests for the Pre-Budget Report. First, would it increase the credibility of government plans to restore the public finances? Second, would it be a platform for job creation and economic growth? The Government has failed on both counts. It is a serious mistake to impose an extra jobs tax at a time when the economic recovery will still be fragile. Increasing National Insurance contributions will hold back job creation and growth and there has also been little effort to improve further the public finance position. Rather, the PBR states that the measures announced amount to a fiscal loosening rather than tightening.” At this point, most would agree that the solutions to both of the CBI’s challenges will not take shape until after the election. As Fitch, the ratings agency, puts it: “Everything hinges on the election, what measures will be put in place and how draconian they are going to be. In this respect, a hung parliament may be the worst outcome because it would allow less freedom to take severe and effective economic measures.”
Geographic ripples Meanwhile, the recession, which initially hit harder in the South of England, has travelled further north. As Baker Tilly’s discussions among its clients in the North and Midlands have highlighted, manufacturing, which was already weakening, has been hard hit in those regions. Yet Scotland, outside of the financial and property sectors, has so far not been as badly affected. “There are fears, however, that the recessionary shockwave will soon hit other sectors of the economy north of the border, particularly due to its heavy dependence on the public sector,” according to Edinburgh-based partner, Keith Anderson.
The CBI’s end of December economic forecast predicted that Q4 2009 would be when the country emerged from recession but it, along with Bank of England Governor, Mervyn King, predicts a long, slow haul. There is some evidence, however, from the Engineering Employers Federation to suggest that some manufacturing businesses are moving production back to the UK. This is due to concerns about the quality of goods produced in a number of low-cost locations and the stability of some overseas manufacturers. A restored confidence required “Although the first few months of 2010 will be difficult,” predicts CBI Deputy Director-General John Cridland, “growth will gradually pick up and increasing confidence and demand will lead the UK into a more positive 2011. Consumer spending looks to be slightly more resilient than we first thought, and a weaker pound will help to support export growth. However, the economy will be on a fragile path of very slow growth, as we continue to feel the lasting effects of the financial crisis.” Some glimmers of recovery might be starting to filter through, but as with any retreating recession, the recovery period will present fears of a ‘double dip’ and a new set of hurdles for UK PLC.
In November and December 2009, we hosted a number of regional roundtable dinner discussions to address some of the defining factors at play in the UK national and regional economies. The Rt Hon Michael Portillo and Kevin Butler, South West regional agent for the Bank of England, were guest speakers at our Bristol roundtable and are pictured here with Baker Tilly Restructuring and Recovery partner, Andrew Sheridan.
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With so many variables at play in the current UK economy, it is not surprising to see such a strong degree of uncertainty amongst finance directors on the outlook for the year ahead.
Bob Bailey, Restructuring and Recovery partner, Birmingham
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Outlook 2010 3
Factors at play
In brief
• Government funding will be a major issue • Tax rises after the general election • Capacity gap to narrow in second half of year • Company failures, personal insolvencies and unemployment all likely to rise • Sources of funding may increase – banks and capital markets • Less visible pension deficiencies may bring about corporate distress
How 2010 pans out will very much be a consequence of the financial crisis, the recession which followed and the measures necessary to shift towards recovery.
Because the shape and speed of the recovery are uncertain, no-one can predict with any certainty the exact path through the next 12 months. Some of the factors that will shape the UK business environment, however, are now becoming slightly clearer.
Quantitative easing To 10 December 2009, the Bank of England’s asset purchase programme had disbursed £188.4 billion. £186.4 billion of this was accounted for by holdings of government debt in the form of gilt-edged securities. The takeup of corporate bonds and commercial paper together accounted for not much more that £2 billion. This quantitative easing process is expected to end in February. However, the market in gilts is sufficiently deep and liquid that further issuance of gilts looks certain to be able to be absorbed. In addition, it appears that the banks could be required to buy as much as £200 billion worth of gilts as additional support for their capital bases, under proposals put forward by the Financial Services Authority for implementing amendments to the EU Capital Requirements Directive. Meanwhile, as confidence builds in some quarters and growth in the economy accelerates, albeit perhaps falteringly in the early months of the year, the banks are expected to gradually lend more, taking the pressure off the Bank of England. Moreover, capital markets are predicted to loosen, providing scope for new issues of both corporate debt and equity.
4 Outlook 2010
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Only when the capacity gap has narrowed sufficiently will the downward trend reverse. Most economists are suggesting that this might not be the case until at least the second half of the year.
Andrew Sheridan, Restructuring and Recovery partner, Bristol
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Capacity gap The UK begins 2010 with a significant gap between what the economy can produce and what can be sold, either domestically or abroad. This ‘capacity gap’ contains much of the pain still to be felt by businesses during the year. Further company failures are likely to follow. As is often the case, businesses continue to suffer for some time after recessions may officially have ended. This in turn causes a withdrawal in demand for the goods such companies would have bought from their suppliers and so leads to further job losses in the supply chain. Higher unemployment inevitably leads to lower consumer demand. Cashflow and liquidity The number of companies suffering from late customer payments more than doubled in the previous six months, according to Baker Tilly’s Finance Directors’ perceptions survey, published in November 2009. Our twice-yearly survey, showed that 41% of finance directors reported problems with late payments – more than double the 19% who reported this as an issue in our March survey. Increasingly, businesses are having to fund their working capital through stretching credit terms with their suppliers, as they cannot rely on invoices being paid on time. This is creating a chain reaction throughout the economy and it is likely that we will see more companies go under as pressure on working capital increases. Throughout 2009, the issue of funding for businesses became somewhat clouded. On the one hand, bankers were telling us that they were ready to lend but demand was weak. On the other, policies of rebuilding bank balance sheets by reining in loan-tovalue ratios, ‘normalising’ lending criteria
and tightening credit procedures may also have restricted the availability of funding. Additionally, industry statistics from the asset-based lending sector show that the average loan-to-asset value has reduced by 6% to just over 50% in 2009 – which appears to have resulted from a combination of lack of demand, a tightening of credit policy and the number of company failures. There are, however, rays of hope for greater availability of funding in 2010. The Enterprise Finance Guarantee (EFG), aimed at improving the flow of working capital for small businesses, has been extended by a further year to 31 March 2011. Although the take up of EFG has been patchy to date, this, linked with greater willingness of banks to loosen their lending criteria having worked through their own balance sheet difficulties, is a positive sign. Moreover, following the Bank of England’s decision on 7 January to hold the base rate at 0.5% for a tenth consecutive month, City analysts and economists are expecting that interest rates will stay low for the foreseeable future, despite the risk to inflation, in order not to stifle the early stages of growth in the economy. Unemployment The unemployment rate for the period August to October 2009, as reported in December by the Office of National Statistics, was unchanged on the previous quarter at 7.9%. The number of unemployed in the UK during the quarter totalled almost 2.5 million. These statistics will be watched closely as we move further into 2010, because there is a suspicion that though recovery may take hold, it may not do so quickly enough for some companies – leading them to fail and adding to the jobless total.
HMRC’s attitude to tax payments
Over the last 18 months, the Government has been increasingly supportive of companies who are struggling in the recession and have fallen into arrears with PAYE/NI and VAT, as shown by the fact that over £4.3 billion of tax has been tied up in almost 250,000 deferred payment schemes over that period. We believe that, going forward, HM Revenue & Customs (HMRC) will adopt a twin-pronged approach. “HMRC will continue to agree to deferred payments,” explains David Hudson, partner and London Head of the Formal Insolvency team. “At the same time, as we have seen in the groundbreaking case of Southend United Football Club, it will consider an application for administration order. In this matter, Baker Tilly were the proposed administrators. It now appears that HMRC is taking a more commercial approach, as highlighted in the December’s PBR, where in some cases, it may call for an Independent Business Review from a third party firm of accountants that will form the basis of efforts to help the business survive.” However, HMRC is becoming tougher on those businesses that have not kept to their original payment plans. It also appears unwilling to accept delayed payment stretching past 12 months and it is now much harder to agree anything over 6 months – with, as recently reported, around 60% agreed for only 3 months. HMRC’s stance when companies are unable to meet repayment plans suggests that it will not be able to be as supportive to ailing companies as it has been in the recent past, assessing and monitoring the risks involved and agreeing time for businesses ‘that are not viable and will later fail’. “Our advice to businesses,” David continues, “is to be open with HMRC. Set out the true state of the business and enter into a dialogue. Communication is vital. Be prepared to work with the Crown and they are likely to be prepared to work with you.”
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This is a time for management to act. Strong cash and working capital disciplines need to be displayed to retain control over viability. Failure to do so is increasingly leading to other stakeholders making the decisions for them.
Peter Cooper, Head of Corporate Restructuring
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David Hudson is a partner and London Head of Formal Insolvency.
Outlook 2010 5
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Asset-based lenders move centre stage
Despite immense political pressure to lend, most commentators believe the banks will remain only semi-open for business for some time to come. 2010 will feature re-organisation for many as well as a ‘finding of feet’ period, as they adjust to a new order of business – with government influence over lending markets and indeed its control of some of the principal players. This, together with an uncertain economic environment, is bound to affect decisions by banks on lending requests, particularly from new businesses or those looking to increase their levels of funding. However, asset-based lenders (ABLs) – institutions securing lending against the receivables and other business assets – have been rapidly re-adjusting and are eager to press forward. With a more secure position than other lending structures, the ABL industry has a proven track record of enthusiastically supporting businesses going through change – be it a change in ownership, growth or turnaround. The ABL sector will not shy away from challenging propositions from borrowers, particularly now that the economic climate appears to be stabilising. There are also regulatory drivers which make this form of lending attractive to institutions, as a consequence of the capital adequacy implications of the Basel ll accord. In simple terms, this means that institutions will achieve greater returns from asset-based lending in comparison to most other senior debt structures. The decade to 2008 saw a four-fold increase in the total amount of lending to businesses from the ABL sector. Industry statistics for Q3 2009 provide evidence that the sector is once again expanding. Asset-based lending has moved into the mainstream and my personal opinion is that the sector will deliver double-digit growth in its total lending to businesses in the UK during 2010.
The predicted increase in the base rate later this year may be the last straw for those people who are currently able to manage their finances on reduced hours of work.
Alec Pillmoor, Head of Personal Insolvency, Hull
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Personal Insolvency One of the consequences of the explosion in consumer debt over recent years has been the increased number of people who have been unable to meet their repayment obligations and subsequently entered into insolvency. The result has been an increase in personal insolvencies over the last decade. This has been exacerbated with the credit crunch, as income levels have fallen. 35,242 people entered an insolvency process in the third quarter of 2009 – over 6,000 more than in the whole of 1999. Moving into 2010, it is anticipated that the level of personal insolvencies will continue to increase. A reduction in real incomes with the lack of available overtime, reduced working hours agreements and people searching for viable solutions to historically high levels of
debt that they can no longer service, will all be factors that support this view. Public spending cuts The PBR contained little detail on the subject of public spending cuts, although all political parties agree that they are inevitable. It is widely expected that once the general election has taken place, the new government will move quickly to address this – whichever the political party. The Institute of Fiscal Studies has calculated that significant cuts across public services will be necessary if the Chancellor is to fulfil his budget plans for health, police and education. Consequently, as we go to press, the outlook for public sector funding is uncertain and businesses, analysts and public sector employees themselves await developments post-election with some degree of trepidation.
Steve Merchant is a Director and Head of Asset Based Lending.
6 Outlook 2010
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An increasing number of pension schemes are seen as a huge millstone around the sponsoring employer's neck, massively disproportionate to the employer's size and ability to fund.
Bruce Mackay, Head of Covenant Assessment Services, London
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Pensions deficiencies The effect of shortfalls in company defined benefit pension schemes is often greater than it appears. This, says Bruce Mackay, Baker Tilly’s Head of Covenant Assessment Services, is because there is often a significant difference in the published accounting position of a company pension scheme and the ‘real’ funding position. We have recently seen as a hurdle in a number of potential M&A deals, with the acquirer often initially unaware of the full deficit value. Moreover, with only so much cash to go around and with other stakeholders’ demands on that cash, often more strident and sold as ‘more urgent’ than those of the pension scheme trustees, there is a risk of further serious deterioration in the funding position of many pension schemes. Therefore, for trustees and members, it pays to ask questions so that the scheme deficit attains the transparency and priority it deserves in order to protect members’ benefit.
Unlocking the value of disputes The number of disputes typically rises in times of recession. However, the costs of pursuing a claim can be high and the outcomes uncertain and many cash-strapped businesses will fail to pursue legitimate claims. Forensic Services partner, Tony Chapman suggests businesses may not be aware of the availability of litigation funding. “This is a relatively new concept which allows claimants to unlock otherwise hidden value from disputes”, he says. It works by instructing a law firm who will run the claim on a contingent (CFA) basis – reduced rates but with a success fee – backed by a litigation funder in return for a share of any proceeds and with insurance against the adverse costs risks. Tony adds: “Whilst the level of fees may be high, they will be met either from the costs awarded in a successful claim or by the litigation funder and therefore it de-risks the process and makes it affordable”.
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Litigation funding ought to make it easier for struggling companies to pursue claims. There are now a number of funders looking to buy a slice of the action. However, as they typically require a 30-40% share of damages, it is expensive funding compared to other sources.
Tony Chapman, Forensic Services partner, Leeds
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Outlook 2010 7
Industry outlook
Having explored the economic backdrop and factors at play for the year ahead, what will this all mean for the UK’s major industry sectors?
No single sector is out of the water – and all will undoubtedly see further casualties throughout the next 12 months, with highly-leveraged businesses at greater risk. However, the fittest companies, irrespective of their industry sector, will see the ongoing recession as an opportunity to focus on their key offerings, forward strategies and potentially grow their market share.
Construction and housebuilding
“Unlike other parts of the economy, [the UK construction sector] seems unable to escape the shackles of recession, as it entered its 22nd successive month of decline,” said David Noble, CEO of the Chartered Institute of Purchasing & Supply, earlier this month. A few headline projects aside, including the development of the facilities for the London 2012 Olympics, major new projects are sparse. Anticipated public spending cuts may cause projects to be re-scaled, postponed or even cancelled during 2010. Housebuilders, facing their own obstacles to recovery, are faring better generally than infrastructure players. For most smaller housebuilders, the 2010 outlook is particularly daunting. Many are holding stocks of unsold properties that are proving difficult to sell and have been forced to pick up what work they can and have cut staff against reduced order books. Yet for several of the larger players, like Persimmon, rising house prices – driven by recovering demand – is encouraging new activity. Whilst credit conditions remain tight, it ‘remains cautious’ and has managed down its debts from £1.2 billion to £270 million as a result of strict cash controls, yet has ‘continued confidence in the long-term future of the UK housing market’. Barratt is also resuming construction on eight sites, backed by increased demand. Meanwhile, building products groups, Marshalls, said that although it remained cautious about the short-term outlook, installer order books at the end of October 2009 were an encouraging 8.1 weeks compared to 6.4 weeks for the same period the year before, driven largely by a tentative recovery in the housing market and demand generated by the London 2012 Olympics.
Property
There is some, albeit muted, optimism in both commercial and residential property. Low asset prices are contributing to higher yields on commercial property, attracting investors back to the market. Alan Lovett, Head of Property, Restructuring and Recovery says: “Commercial property with a strong covenant will continue to attract investors, especially as the base rate is expected to remain low for at least the first half of this year.” However, further investment will depend on an overall relaxation of bank funding, which has been particularly fluid in this industry historically. Property company, Telereal Trillium, recently announced it is selling a £475 million portfolio of prime London office space. This signals restoring confidence that buyers are returning to the market. This is not a first, with several overseas buyers, including sovereign wealth funds, having already acquired property in the UK, taking advantage of low asset prices coupled with the decline of sterling against most major currencies. Meanwhile, tenants are seizing opportunities to reduce rates or exit from leases, exerting downward pressure on rents overall. However, those with depressed revenues or low cash reserves, may struggle to meet regular payments to their landlords. In residential property, there are a spectrum of views. On the one hand, the Royal Institute of Chartered Surveyors’ in December said that, despite the increasing number of new instructions, house prices were also rising overall – as demand exceeded supply in some regions, particularly the South East. However, others warn of the risk of a double dip in house prices and a further fall over the next 12 months. Peter Bolton King, Chief Executive of the National Association of Estate Agents talks of a “waitand-see attitude to housing” in early 2010, as potential buyers study what tax changes will mean for them and how the election is likely to play out.
In brief
• No sector ‘recession-proof’ – but some will be quicker to recover • Consumer sectors trading in ‘nonessentials’ still likely to struggle due to cautious spending • Continued recession offers most industrial sectors an opportunity to review stock levels and supply chain efficiencies • ‘Fittest’ businesses in each sector best prepared for recovery
Challenges: Falling sale prices on developments against original land prices are squeezing profit margins; difficulty for home owners to sell existing properties to buy new and first-time buyers to acquire mortgages without significant deposits and the risk of rising interest rates adversely affecting mortgage uptake overall; banks’ reduced appetite to fund developments or guarantee low loan-to-value ratios; maintaining a skilled workforce during periods of low activity. Opportunities: Reported signs of economic recovery should lead to greater consumer confidence and increased purchasing activity; stronger players in the market can increase market share as weaker competitors inevitably fail; unallocated contract opportunities will still exist on London 2012 projects for larger players.
Challenges: Residential property faces variable factors making planning difficult; tougher lending criteria against a slight increase in mortgage availability will impact on demand; commercial property players restricted by the availability of reliable and solvent tenants; the impending General Election will cause uncertainty, impacting on home buyers/investors’ purchasing decisions. Opportunities: Asset prices remain low overall, offering opportunities to those with the cash and the confidence to buy while the base rate stays low; if sterling declines further, more foreign buyers are likely to enter the market; as lending increases prices will begin to creep up.
Alan Lovett Head of Property, Restructuring and Recovery London Tel: 020 7002 8600
Phil Pierce Restructuring and Recovery partner Leeds Tel: 0113 285 5000
8 Outlook 2010
Manufacturing
“Whilst conditions are continuing to improve on the back of recovering world markets and a weaker currency, there is little to suggest that we are in for anything other than a long, slow haul out of recovery.” Chief economist of the Engineering Employers Federation, Lee Hopley, paints a challenging picture. He continues: “Manufacturers have been grappling with extremely difficult trading conditions for more than a year now, but we’re not out of the woods yet and a great deal of economic uncertainty remains.” Although in July, the Government launched a £150 million package to assist manufacturers to take advantage of new technologies, this is relatively small beer and will do little to assist traditional, low-tech businesses. However, 2009 closed with some relatively encouraging news. The monthly Purchasing Managers’ Index (PMI) produced by the Chartered Institute of Purchasing & Supply rose at the fastest pace for two years. The PMI collates, among other things, data gathered from purchasing managers about levels of production and new orders. While one such report does not necessarily signal that recession in manufacturing is over, it does provide some scope for optimism. Russell Cash, one of the partners in our Manchester office involved in the administration of WH Crossley Ltd, a niche manufacturer to the rail industry, says that it is certainly challenging times for manufacturing businesses: “Survival in the current climate depends to an extent on where a business sits in the food chain. Some smaller businesses may find they have little negotiating power and are being squeezed at both ends by customers stretching payments and by suppliers demanding shorter payment terms. Larger businesses may be able to take advantage and dictate terms to an extent.”
Hi-tech
The hi-tech industries, which generate 10% of UK GDP and 15% of UK trade, have been hit hard by the recession. Fund providers, have increasingly been, and continue to be, very selective about which businesses and R&D projects they support. Funders may toughen their approach as they decline to invest new money – which such progress industries rely on – without guaranteed returns or even seek to recover initial investments through the sale of the businesses they have lent to. According to Intellect, the trade association for the UK technology industry: “SMEs tell us that investment funding is still an issue. Traditional sources of cash such as bank loans have been restricted or withdrawn and there is a shortage of venture capital funding. As a result, expansion, product development and other R&D activities are being held back.” Few players in the sector have managed their cash reserves well and rarely allow themselves to try to resolve their financial issues, in often ‘just in time’ pipelines. Where solutions are derived, these are often sales driven, which is usually the area of their business least under their control. In 2009, Graham Bushby, a partner in our Birmingham and Milton Keynes offices, worked on the administration and subsequent sale of Cecure, an online poker gaming platform. Commenting on the sector, he says: “Concerns in 2010 are unlikely to lessen sufficiently. Future worries for the sector include limited access to funding, generally weak and volatile demand levels and a growing range of supply issues throughout the value chain.” Intellect goes on to challenge the UK’s technology framework saying that certain segments of the industry are ‘at risk of being constrained unless a fit for purpose digital infrastructure and adequate support are brought forward’.
Distribution and logistics
The second half of 2009 saw over a quarter of all businesses in the sector make job cuts. However, perception amongst the industry is that job losses for 2010 should be less than in other sectors and the bottom of the recession has been reached for the sector. Over one-third of businesses optimistically expect to see growth during 2010. As the performance of this industry fundamentally hinges on demand from both ends of the supply chain, tough times for both manufacturers and retailers hit this sector hard. This particular recession has been more global in its impact and therefore, the prospect of distribution worldwide has not been available to offset the internal UK slump. Survival remains key for 2010 and the prospect of further mergers and acquisitions by some of the larger players is likely as they aim to grow market share. Those businesses who have viewed the recession as an opportunity to re-evaluate their strategic plan for the future of the business – implementing cost savings and other efficiencies – should find themselves in a much stronger position once the recession formally ends and business levels start to increase. Almost twothirds of UK transport and logistics businesses feel the recession has made their operations more efficient and see other positives, including a greater focus on servicing their customers (34%), according to recent research from Barclays. As with all recessions, the key now for this sector is to ensure that there is sufficient cash to continue to trade when business starts to pick up – in particular, to take advantage of what could be seen to be cheap UK goods being imported into the eurozone following the slump in the value of sterling over the last 12-18 months.
Challenges: Decisions over job losses or less painful efficiencies to improve working capital such as improved stock control; releasing slow-moving stock at discounted prices; greater focus on chasing outstanding debtors; renegotiation of contracts with various service providers wherever possible. Opportunities: Acquisition of distressed competitors to increase capacity or market share; recruitment of best talent from collapsed competitors; ideal time to focus further on customer care and quality assurance.
Challenges: Limited credit available; funders toughening their approaches and seeking ‘guarantees’ against returns; weak demand levels both domestically and internationally. Opportunities: To focus on key business areas and core offerings; potential rewards for smarter sales and marketing drives; chance to review supply chain efficiencies and further reduce unnecessary costs.
Challenges: Heavy dependency on the fate of supplier and customer bases; seeking out new business in an evercompetitive marketplace; maximising working capital and reducing day-to-day operational costs; overseas and UK markets both impacted by global recession. Opportunities: Chance to review or re-assess efficiencies and longer-term vision of the business; M&A opportunities for those looking to acquire distressed businesses in order to grow market share or move into new service areas; a competitive edge when market recovers for those who have made necessary provisions during the recession.
Russell Cash Restructuring and Recovery partner Manchester Tel: 0161 830 4000
Graham Bushby Restructuring and Recovery partner Birmingham/Milton Keynes Tel: 0121 214 3100
Matt Wild Restructuring and Recovery partner Guildford Tel: 01483 307000
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Outlook 2010 9
Sectors (continued)
Retail
Despite the 0.3% fall in UK retail sales for November, according to the Office of National Statistics, and a harsher winter than expected, sentiment in trading over Christmas remained positive for most retailers. Record Boxing Day sales, an impending VAT increase and low interest rates certainly helped footfall and increased retailer confidence. The London market has also been significantly bolstered by eurozone shoppers seeking value outside their home countries. Homeware and big ticket items traded strongly pre- and post-Christmas, as did both luxury stores such as Selfridges with sales up 16% and discounters including Matalan up 13.7%. Next also announced better than expected results for both its stores and Directory business. However, the picture was more mixed across the high street. Despite a first return to sales growth in two years for Marks & Spencer, which had an overall ‘good Christmas’ according to its Chairman, Sir Stuart Rose, its share price still fell by 6.8%. Consumers will undoubtedly rein in their spending during early 2010. With the economy still in recession, predicted unemployment ranging up to 2.8 million, an upcoming election and uncertain tax regime, the consumer economy is likely to start slowly in the first half of the year. Stephen Robertson, Chairman of the British Retail Consortium says: “The impact of the VAT increase is a concern but other clouds are gathering. Customers are cautious, jobs are a big worry and neither will be helped by the tax battering promised by the Chancellor.” Sir Philip Green added that it would be “a very challenging, tough, competitive landscape without change... until the general election is out of the way”. The likelihood is sales will be broadly flat. Customers will continue to seek value and brands that have traded well so far during the recession should continue to benefit.
Motor
At the start of the recession, no other sector suffered as dramatically as car retailing, as an almost instant reduction in demand for new cars caused an immediate flurry of weaker players to leave the industry. The underlying theme for 2009 in the sector was ‘great escape’. New car sales fell by almost 26% in the first half of the year, yet in the second half grew by 21% – thanks to the Government’s scrappage scheme. However, the net fall resulted in the lowest number of new registrations since 1995, according to the Society of Motor Manufacturers and Traders (SMMT). At the end of 2008, manufacturers quickly reduced supplies of vehicles by putting their factories on short working which led to a shortage of product in 2009 and an increase in margins for dealers, as the industry moved away from a ‘pile them high and sell them cheap’ mentality. Additionally, the scrappage scheme increased footfall overall, even though the direct beneficiaries tended to be smaller models and a few suppliers who currently see over 60% of their sales supported by the scheme. “As we reach the beginning of 2010, the majority of the retail motor industry is breathing a sigh of relief for surviving the year – something which looked unlikely in Autumn 2008,” says Graham Bushby, Head of Motor for Baker Tilly Restructuring and Recovery. “But as VAT returns to 17.5% and the scrappage scheme comes to an end in early 2010, the going is likely to get a lot tougher again for the industry over the year ahead.” It’s not surprising therefore, as our second Retailing in the Recession survey with Motor Trader magazine found, the majority of dealerships (59%) do not expect the sector to pull out of recovery until at least early 2011.
Leisure and hospitality
Heavily dependent on consumer spending, the sector will find 2010 another challenging year. Rising living costs, increasing unemployment and jobs uncertainty will all force consumers to keep a close eye on their disposable income and demand bargain offers. Pub drinking declined sharply in 2009, with 11 pubs closing every week in London alone, according to new figures issued by the British Beer & Pub Association (BBPA) – and hitting other regions hard. In response, campaigners for the pubs industry are calling on the Government to reverse the 8% increase in duty on beer imposed after VAT cuts last January, now the 17.5% rate has returned – and to scrap the proposed 2% above inflation increase, in this year’s Budget. Yet, as the Chancellor sees an 84% share of the £8.6 billion total tax and profit on beer sales, this will be a battle. The gambling industries have a mixed outlook overall. Although the ‘recession opportunists’ spend more in downturns and 2010’s major sporting events provide industry optimism, changes to gambling licence rules and the smoking ban were key factors behind Agora, a highstreet chain of adult gaming centres, going into administration with Baker Tilly in late 2009. In contrast, confidence amongst the UK hotel industry is restoring, according to the latest Hotel Confidence Monitor from TRI Hospitality Consulting, with half of hotel managers ‘more optimistic’ in Q4 than Q3 2009, bolstered by Christmas trading. According to Bob Cotton, Chief Executive of the British Hospitality Association, “innovative and sustained marketing programmes, professional management [and] rigorous cost controls” lead to fewer hotel insolvencies than expected for 2009. Last year, Baker Tilly traded and sold a number of high-profile hotels, including The Forbury in Reading and Haleys in Leeds.
Challenges: Maintaining a value proposition for consumers who are facing impending personal tax hikes; public and private sector job uncertainty and expectations of mortgage rate increases in later 2010 will impact on consumer spending overall; 17.5% VAT impact on pricing; rent and corporation tax due in January, March’s quarterly rent ‘roll’ and a less accommodating HMRC. Opportunities: Favourable leasehold renewal climate; lower inventory levels; increasing promotional activities to drive footfall and focus on value.
Challenges: Scrappage scheme coming to an end early this year; the return of 17.5% VAT; a cautious-spending public fuelled by jobs uncertainty and predicted postelection mortgage rate increases. Opportunities: Scrappage scheme has grown market share for certain manufacturers and dealerships to build on; consumers with low personal debt are more likely to purchase brand new vehicles cost-effectively.
Challenges: For hotels, price-sensitivity will result in a decline in average room rates, squeezing margins; business travel looks to be further replaced by networking technologies, such as conference calling; jobs uncertainty and rising living costs increase consumer reluctance to spend on leisure pursuits; the 17.5% VAT rate return is already hitting hard, particularly in the pubs segment. Opportunities: A change in government could lead to a change in tax for the beer and pub industries; a ‘stay home’ mentality during recessions presents continued opportunities for domestic tourism, particularly in regions hit hard in other industries.
Lindsey Cooper Restructuring and Recovery partner Manchester Tel: 0161 830 4000
Graham Bushby Head of Motor, Restructuring and Recovery Birmingham/Milton Keynes Tel: 0121 214 3100
Simon Bower Restructuring and Recovery partner London Tel: 020 7002 8600
10 Outlook 2010
Travel
2010 will be another difficult year for the travel industry, as it relies heavily upon an improvement in consumer spending and overall confidence – according to Baker Tilly, an ABTA travel industry partner. The need for a review of consumer protection will be high on the agenda for the year, in view of recent failures such as Flyglobespan, the collapsed Scottish airline. ‘The unexpected’ – such as terrorist threats and potential epidemics – are also likely to impact on confidence. Whilst 2009 saw a 10% year-on-year fall in passenger numbers, the level was still higher than in 2002, illustrating the level of growth in recent years. Tour operators responded by making capacity cuts to protect themselves, in contrast to the dramatic falls in profit that have hit airlines. The industry generally adapted well last year – but could it cope with a similar fall over the next 12 months? European destinations have been damaged by exchange rates and 2009’s poor euro/pound conversion looks set to continue. The pound/dollar ratio looks more settled at a respectable 1.6. Agents will be looking for continued growth in e-sales and observers will be interested to see how the industry utilises new media, such as social networking, as a marketing tool. The World Cup, Winter Olympics and Ashes will all ensure a bumper year of sports travel in 2010 – however, inherent to this will be the growing risk of fake ticketing scams and uninsured travel packages. Mark Wilson, a partner in our Watford office comments: “Innovation and highly competitive marketing activity will undoubtedly be key for survival, together with a strong focus on the end consumer, as the industry aims to restore public confidence.”
Professional practices
‘Best in class’ professional practices, having staked out a strong market presence and respected position in their chosen markets, are likely to fare better in 2010 than their competitors – unless their specialism happens to have been recession-hit, such as conveyancing. Consolidation among the stronger firms looks likely to continue, as the main players seek out attractive acquisitions. Whether in accountancy or law, two weaker firms may add up to a stronger one. Alternatively, combining complementary skills, while reducing administration and other overheads, can ensure a profitable future. Without doubt, the single biggest concern for the year should be cash. Firms need to be invoicing clients as early as possible, chasing receivables efficiently with every effort made to haul in cash. With plenty of calls on clients’ scarce resources, creditors that make the most noise are most likely to get paid. Inventory management and timely, even daily, management information will therefore remain crucial to keeping a tight grip on the business. With HMRC still ranking high among many firms’ creditors and tax bills due on 31 January 2010, now is also the time for them to consider whether it is necessary to apply to HMRC under the Business Payment Support Service to arrange more time to pay tax bills. The sector should hold up fairly well but is not recessionproof, as evidenced by more firms going out of business during the last recovery than in the preceding recession and a predicted rise in insolvencies for 2010, particularly at the smaller end of the spectrum.
Charity and not-for-profit
The ‘third’ sector appears, in the main, to be weathering the current economic downturn relatively well. However, it can expect tougher times in the next 12 months with no anticipated marked improvement until the second quarter of 2011, according to our recent survey Managing Charity Finances Through Uncertain Times. Some of the larger charities have seen a modest decline in donations, yet smaller organisations continue to maintain their existing income from their loyal donor base. Not surprisingly, organisations that relied on high interest rates and dividends for income are finding themselves with increasing cash pressures – but many are positive about this turning around in 2010. With the economic climate as it is, there is also a decline in corporate giving. However, this may give rise to the opportunity to boost volunteer numbers and provide additional commercial support for charities which the sector would welcome. Government funding will have a major impact in 2010. The sector anticipates a reduction in the amount available and it is also thought that there will be a move from traditional revenue funding to more project-specific based funding. Charities must price projects accordingly and cover all associated overhead costs to ensure that these projects do not cause a drain on existing cash reserves. Charities who are successful in attracting funding will increasingly have to demonstrate their social impact i.e. for every £1 of funding provided, how much value is given back to the community – in short, what is their social return on investment?
Challenges: Strongly dependent on overall consumer confidence; trend towards ‘stay home’ vacations in the UK; strength of the euro against sterling; anticipated increase in unemployment leading to consumer hesitation in making bookings; expected increases in mortgage rate in late 2010 will impact on consumer spending. Opportunities: Promote non-eurozone destinations, such as Turkey; online sales still present an opportunity; consolidation to increase market share; long-term prospects for the industry still remain strong overall.
Challenges: Maintaining clients in an extremely competitive market; decisions over staffing levels to ensure production levels can be maintained and opportunities grasped, at the same time ensuring recovery rates are maximised; working capital remains key so timely billing and debtor collection are vital. Opportunities: Current downturn and the accessible resource pool represents an opportunity to diversify into new markets; acquisition/merger with distressed practices to enhance specialisms offered and gain entry into new markets.
Challenges: Putting in place and acting on plans early to counteract the anticipated shortfall in government funding or annual income; seeking out new sources of income, particularly where heavily dependent on just one or a few streams; planning ahead whilst also dealing with current challenges. Opportunities: Forming working alliances and mergers with other charities to potentially reduce costs and ensure a sustainable future; an opportunity to review services offered as well as fundraising programmes to focus on the most productive activities; a good time for reviewing and renegotiating contracts.
Mark Wilson Restructuring and Recovery partner Watford Tel: 01923 816400
Tony Wright Restructuring and Recovery director London Tel: 020 7002 8600
Karen Spears Head of Charities, Restructuring and Recovery Watford Tel: 01923 816400
www.bakertilly.co.uk
Outlook 2010 11
Baker Tilly
Baker Tilly is a leading independent firm of accountants and business advisers that specialises in providing an integrated range of services. We provide our growing and established business clients with audit, accountancy, personal and corporate taxation, VAT, management consultancy, corporate finance, IT advisory, restructuring and recovery and forensic services. The firm has national coverage through its network of offices and is represented internationally through its independent membership of Baker Tilly International.
Restructuring and Recovery key contacts:
National Head Tracey Callaghan 020 7002 8600
Birmingham Phillip Allen Bob Bailey Graham Bushby Guy Mander Bristol Andrew Sheridan Bury St Edmunds Nigel Millar Crawley John Ariel Edinburgh Keith Anderson David Menzies Glasgow David Menzies Guildford Matthew Wild Hull Alec Pillmoor Leeds Adrian Allen Phil Pierce Mark Ranson Forensic Services Tony Chapman Ross MacLaverty Marcus McCaffrey
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Baker Tilly UK Audit LLP, Baker Tilly Tax and Advisory Services LLP, Baker Tilly Corporate Finance LLP, Baker Tilly Restructuring and Recovery LLP and Baker Tilly Tax and Accounting Limited are not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services because we are members of the Institute of Chartered Accountants in England and Wales. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. Baker Tilly & Co Limited is authorised and regulated by the Financial Services Authority to conduct a range of investment business activities.
Still crystal ball gazing?
January 2010
Restructuring and Recovery
Real people, real solutions
A rocky road to recovery
In brief
• Recession formally ends • General election to determine the course of government tax measures • Rates of inflation, interest and growth all low in 2010 • More insolvencies, more unemployment likely
Commentators are saying that the recession is as good as over – but it may not feel like it.
Baker Tilly’s twice-yearly Finance Directors’ perceptions survey, published in November 2009, revealed that just over half of all respondents (54%) expected no improvement in trading conditions for their business over the next 12 months, while more than a further quarter (28%) expect trading conditions to worsen throughout 2010.
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2010 looks set to be a long, hard slog and there will be some more pain, in terms of additional insolvencies and further job losses, on what will undoubtedly be a rocky road to recovery.
Tracey Callaghan, Head of Restructuring and Recovery
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A premature optimism? Yet the Organisation for Economic Co-operation and Development (OECD) optimistically said in its November economic outlook: “The [UK] economy is set for recovery, supported by improving financial conditions, an expansionary monetary policy and stronger international growth. However, the pick-up will be slow with GDP projected to grow by slightly more than 1% in 2010, reflecting strong headwinds from balance sheet adjustments, a still weakening labour market and fiscal tightening.” It goes on to add that it will not be until 2011 that the recovery will “gain momentum” and then estimates that unemployment will reach 9.5%, although
inflation is likely to remain less than 2% and interest rates are also set to stay low. In early December, the Institute of Directors’ Chief Economist and Executive, Spencer Dale, was a little more upbeat: “The economy appears to have turned… We are likely to be moving into a period of renewed expansion”. He says that the weak sterling will give a boost to exports and now that companies have had an opportunity to reduce their inventories, they should be in better shape. He goes on to refer to how fragile such a recovery may be and that the Government should not pursue policies that may damage its nascent green shoots.
2 Outlook 2010
www.bakertilly.co.uk
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Global factors will continue to impact on how fast the UK will emerge from this recession. Can we be competitive again or will we lose out to faster moving economies?
Geoff Carton-Kelly, Head of Special Investigations and Baker Tilly International contact partner
And that is what it has done, if you believe that good economic intentions underpin Alistair Darling’s Pre-Budget Report (PBR). There were no immediate significant tax rises. Yes – public sector cuts will follow. VAT returned to 17.5% from January 1. The overall thrust was continued support for the recovery.
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Easing the woes One of the big questions for 2010 is what will replace quantitative easing (QE), expected to be phased out in February, especially as the PBR made reference to £175 billion of additional debt-raising in the pipeline? And a second question – what will it ultimately cost the UK taxpayer? The Confederation of British Industry (CBI) was forthright in its criticism of the PBR: “There were two tests for the Pre-Budget Report. First, would it increase the credibility of government plans to restore the public finances? Second, would it be a platform for job creation and economic growth? The Government has failed on both counts. It is a serious mistake to impose an extra jobs tax at a time when the economic recovery will still be fragile. Increasing National Insurance contributions will hold back job creation and growth and there has also been little effort to improve further the public finance position. Rather, the PBR states that the measures announced amount to a fiscal loosening rather than tightening.” At this point, most would agree that the solutions to both of the CBI’s challenges will not take shape until after the election. As Fitch, the ratings agency, puts it: “Everything hinges on the election, what measures will be put in place and how draconian they are going to be. In this respect, a hung parliament may be the worst outcome because it would allow less freedom to take severe and effective economic measures.”
Geographic ripples Meanwhile, the recession, which initially hit harder in the South of England, has travelled further north. As Baker Tilly’s discussions among its clients in the North and Midlands have highlighted, manufacturing, which was already weakening, has been hard hit in those regions. Yet Scotland, outside of the financial and property sectors, has so far not been as badly affected. “There are fears, however, that the recessionary shockwave will soon hit other sectors of the economy north of the border, particularly due to its heavy dependence on the public sector,” according to Edinburgh-based partner, Keith Anderson.
The CBI’s end of December economic forecast predicted that Q4 2009 would be when the country emerged from recession but it, along with Bank of England Governor, Mervyn King, predicts a long, slow haul. There is some evidence, however, from the Engineering Employers Federation to suggest that some manufacturing businesses are moving production back to the UK. This is due to concerns about the quality of goods produced in a number of low-cost locations and the stability of some overseas manufacturers. A restored confidence required “Although the first few months of 2010 will be difficult,” predicts CBI Deputy Director-General John Cridland, “growth will gradually pick up and increasing confidence and demand will lead the UK into a more positive 2011. Consumer spending looks to be slightly more resilient than we first thought, and a weaker pound will help to support export growth. However, the economy will be on a fragile path of very slow growth, as we continue to feel the lasting effects of the financial crisis.” Some glimmers of recovery might be starting to filter through, but as with any retreating recession, the recovery period will present fears of a ‘double dip’ and a new set of hurdles for UK PLC.
In November and December 2009, we hosted a number of regional roundtable dinner discussions to address some of the defining factors at play in the UK national and regional economies. The Rt Hon Michael Portillo and Kevin Butler, South West regional agent for the Bank of England, were guest speakers at our Bristol roundtable and are pictured here with Baker Tilly Restructuring and Recovery partner, Andrew Sheridan.
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With so many variables at play in the current UK economy, it is not surprising to see such a strong degree of uncertainty amongst finance directors on the outlook for the year ahead.
Bob Bailey, Restructuring and Recovery partner, Birmingham
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Outlook 2010 3
Factors at play
In brief
• Government funding will be a major issue • Tax rises after the general election • Capacity gap to narrow in second half of year • Company failures, personal insolvencies and unemployment all likely to rise • Sources of funding may increase – banks and capital markets • Less visible pension deficiencies may bring about corporate distress
How 2010 pans out will very much be a consequence of the financial crisis, the recession which followed and the measures necessary to shift towards recovery.
Because the shape and speed of the recovery are uncertain, no-one can predict with any certainty the exact path through the next 12 months. Some of the factors that will shape the UK business environment, however, are now becoming slightly clearer.
Quantitative easing To 10 December 2009, the Bank of England’s asset purchase programme had disbursed £188.4 billion. £186.4 billion of this was accounted for by holdings of government debt in the form of gilt-edged securities. The takeup of corporate bonds and commercial paper together accounted for not much more that £2 billion. This quantitative easing process is expected to end in February. However, the market in gilts is sufficiently deep and liquid that further issuance of gilts looks certain to be able to be absorbed. In addition, it appears that the banks could be required to buy as much as £200 billion worth of gilts as additional support for their capital bases, under proposals put forward by the Financial Services Authority for implementing amendments to the EU Capital Requirements Directive. Meanwhile, as confidence builds in some quarters and growth in the economy accelerates, albeit perhaps falteringly in the early months of the year, the banks are expected to gradually lend more, taking the pressure off the Bank of England. Moreover, capital markets are predicted to loosen, providing scope for new issues of both corporate debt and equity.
4 Outlook 2010
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Only when the capacity gap has narrowed sufficiently will the downward trend reverse. Most economists are suggesting that this might not be the case until at least the second half of the year.
Andrew Sheridan, Restructuring and Recovery partner, Bristol
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Capacity gap The UK begins 2010 with a significant gap between what the economy can produce and what can be sold, either domestically or abroad. This ‘capacity gap’ contains much of the pain still to be felt by businesses during the year. Further company failures are likely to follow. As is often the case, businesses continue to suffer for some time after recessions may officially have ended. This in turn causes a withdrawal in demand for the goods such companies would have bought from their suppliers and so leads to further job losses in the supply chain. Higher unemployment inevitably leads to lower consumer demand. Cashflow and liquidity The number of companies suffering from late customer payments more than doubled in the previous six months, according to Baker Tilly’s Finance Directors’ perceptions survey, published in November 2009. Our twice-yearly survey, showed that 41% of finance directors reported problems with late payments – more than double the 19% who reported this as an issue in our March survey. Increasingly, businesses are having to fund their working capital through stretching credit terms with their suppliers, as they cannot rely on invoices being paid on time. This is creating a chain reaction throughout the economy and it is likely that we will see more companies go under as pressure on working capital increases. Throughout 2009, the issue of funding for businesses became somewhat clouded. On the one hand, bankers were telling us that they were ready to lend but demand was weak. On the other, policies of rebuilding bank balance sheets by reining in loan-tovalue ratios, ‘normalising’ lending criteria
and tightening credit procedures may also have restricted the availability of funding. Additionally, industry statistics from the asset-based lending sector show that the average loan-to-asset value has reduced by 6% to just over 50% in 2009 – which appears to have resulted from a combination of lack of demand, a tightening of credit policy and the number of company failures. There are, however, rays of hope for greater availability of funding in 2010. The Enterprise Finance Guarantee (EFG), aimed at improving the flow of working capital for small businesses, has been extended by a further year to 31 March 2011. Although the take up of EFG has been patchy to date, this, linked with greater willingness of banks to loosen their lending criteria having worked through their own balance sheet difficulties, is a positive sign. Moreover, following the Bank of England’s decision on 7 January to hold the base rate at 0.5% for a tenth consecutive month, City analysts and economists are expecting that interest rates will stay low for the foreseeable future, despite the risk to inflation, in order not to stifle the early stages of growth in the economy. Unemployment The unemployment rate for the period August to October 2009, as reported in December by the Office of National Statistics, was unchanged on the previous quarter at 7.9%. The number of unemployed in the UK during the quarter totalled almost 2.5 million. These statistics will be watched closely as we move further into 2010, because there is a suspicion that though recovery may take hold, it may not do so quickly enough for some companies – leading them to fail and adding to the jobless total.
HMRC’s attitude to tax payments
Over the last 18 months, the Government has been increasingly supportive of companies who are struggling in the recession and have fallen into arrears with PAYE/NI and VAT, as shown by the fact that over £4.3 billion of tax has been tied up in almost 250,000 deferred payment schemes over that period. We believe that, going forward, HM Revenue & Customs (HMRC) will adopt a twin-pronged approach. “HMRC will continue to agree to deferred payments,” explains David Hudson, partner and London Head of the Formal Insolvency team. “At the same time, as we have seen in the groundbreaking case of Southend United Football Club, it will consider an application for administration order. In this matter, Baker Tilly were the proposed administrators. It now appears that HMRC is taking a more commercial approach, as highlighted in the December’s PBR, where in some cases, it may call for an Independent Business Review from a third party firm of accountants that will form the basis of efforts to help the business survive.” However, HMRC is becoming tougher on those businesses that have not kept to their original payment plans. It also appears unwilling to accept delayed payment stretching past 12 months and it is now much harder to agree anything over 6 months – with, as recently reported, around 60% agreed for only 3 months. HMRC’s stance when companies are unable to meet repayment plans suggests that it will not be able to be as supportive to ailing companies as it has been in the recent past, assessing and monitoring the risks involved and agreeing time for businesses ‘that are not viable and will later fail’. “Our advice to businesses,” David continues, “is to be open with HMRC. Set out the true state of the business and enter into a dialogue. Communication is vital. Be prepared to work with the Crown and they are likely to be prepared to work with you.”
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www.bakertilly.co.uk
This is a time for management to act. Strong cash and working capital disciplines need to be displayed to retain control over viability. Failure to do so is increasingly leading to other stakeholders making the decisions for them.
Peter Cooper, Head of Corporate Restructuring
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David Hudson is a partner and London Head of Formal Insolvency.
Outlook 2010 5
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Asset-based lenders move centre stage
Despite immense political pressure to lend, most commentators believe the banks will remain only semi-open for business for some time to come. 2010 will feature re-organisation for many as well as a ‘finding of feet’ period, as they adjust to a new order of business – with government influence over lending markets and indeed its control of some of the principal players. This, together with an uncertain economic environment, is bound to affect decisions by banks on lending requests, particularly from new businesses or those looking to increase their levels of funding. However, asset-based lenders (ABLs) – institutions securing lending against the receivables and other business assets – have been rapidly re-adjusting and are eager to press forward. With a more secure position than other lending structures, the ABL industry has a proven track record of enthusiastically supporting businesses going through change – be it a change in ownership, growth or turnaround. The ABL sector will not shy away from challenging propositions from borrowers, particularly now that the economic climate appears to be stabilising. There are also regulatory drivers which make this form of lending attractive to institutions, as a consequence of the capital adequacy implications of the Basel ll accord. In simple terms, this means that institutions will achieve greater returns from asset-based lending in comparison to most other senior debt structures. The decade to 2008 saw a four-fold increase in the total amount of lending to businesses from the ABL sector. Industry statistics for Q3 2009 provide evidence that the sector is once again expanding. Asset-based lending has moved into the mainstream and my personal opinion is that the sector will deliver double-digit growth in its total lending to businesses in the UK during 2010.
The predicted increase in the base rate later this year may be the last straw for those people who are currently able to manage their finances on reduced hours of work.
Alec Pillmoor, Head of Personal Insolvency, Hull
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Personal Insolvency One of the consequences of the explosion in consumer debt over recent years has been the increased number of people who have been unable to meet their repayment obligations and subsequently entered into insolvency. The result has been an increase in personal insolvencies over the last decade. This has been exacerbated with the credit crunch, as income levels have fallen. 35,242 people entered an insolvency process in the third quarter of 2009 – over 6,000 more than in the whole of 1999. Moving into 2010, it is anticipated that the level of personal insolvencies will continue to increase. A reduction in real incomes with the lack of available overtime, reduced working hours agreements and people searching for viable solutions to historically high levels of
debt that they can no longer service, will all be factors that support this view. Public spending cuts The PBR contained little detail on the subject of public spending cuts, although all political parties agree that they are inevitable. It is widely expected that once the general election has taken place, the new government will move quickly to address this – whichever the political party. The Institute of Fiscal Studies has calculated that significant cuts across public services will be necessary if the Chancellor is to fulfil his budget plans for health, police and education. Consequently, as we go to press, the outlook for public sector funding is uncertain and businesses, analysts and public sector employees themselves await developments post-election with some degree of trepidation.
Steve Merchant is a Director and Head of Asset Based Lending.
6 Outlook 2010
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An increasing number of pension schemes are seen as a huge millstone around the sponsoring employer's neck, massively disproportionate to the employer's size and ability to fund.
Bruce Mackay, Head of Covenant Assessment Services, London
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Pensions deficiencies The effect of shortfalls in company defined benefit pension schemes is often greater than it appears. This, says Bruce Mackay, Baker Tilly’s Head of Covenant Assessment Services, is because there is often a significant difference in the published accounting position of a company pension scheme and the ‘real’ funding position. We have recently seen as a hurdle in a number of potential M&A deals, with the acquirer often initially unaware of the full deficit value. Moreover, with only so much cash to go around and with other stakeholders’ demands on that cash, often more strident and sold as ‘more urgent’ than those of the pension scheme trustees, there is a risk of further serious deterioration in the funding position of many pension schemes. Therefore, for trustees and members, it pays to ask questions so that the scheme deficit attains the transparency and priority it deserves in order to protect members’ benefit.
Unlocking the value of disputes The number of disputes typically rises in times of recession. However, the costs of pursuing a claim can be high and the outcomes uncertain and many cash-strapped businesses will fail to pursue legitimate claims. Forensic Services partner, Tony Chapman suggests businesses may not be aware of the availability of litigation funding. “This is a relatively new concept which allows claimants to unlock otherwise hidden value from disputes”, he says. It works by instructing a law firm who will run the claim on a contingent (CFA) basis – reduced rates but with a success fee – backed by a litigation funder in return for a share of any proceeds and with insurance against the adverse costs risks. Tony adds: “Whilst the level of fees may be high, they will be met either from the costs awarded in a successful claim or by the litigation funder and therefore it de-risks the process and makes it affordable”.
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www.bakertilly.co.uk
Litigation funding ought to make it easier for struggling companies to pursue claims. There are now a number of funders looking to buy a slice of the action. However, as they typically require a 30-40% share of damages, it is expensive funding compared to other sources.
Tony Chapman, Forensic Services partner, Leeds
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Outlook 2010 7
Industry outlook
Having explored the economic backdrop and factors at play for the year ahead, what will this all mean for the UK’s major industry sectors?
No single sector is out of the water – and all will undoubtedly see further casualties throughout the next 12 months, with highly-leveraged businesses at greater risk. However, the fittest companies, irrespective of their industry sector, will see the ongoing recession as an opportunity to focus on their key offerings, forward strategies and potentially grow their market share.
Construction and housebuilding
“Unlike other parts of the economy, [the UK construction sector] seems unable to escape the shackles of recession, as it entered its 22nd successive month of decline,” said David Noble, CEO of the Chartered Institute of Purchasing & Supply, earlier this month. A few headline projects aside, including the development of the facilities for the London 2012 Olympics, major new projects are sparse. Anticipated public spending cuts may cause projects to be re-scaled, postponed or even cancelled during 2010. Housebuilders, facing their own obstacles to recovery, are faring better generally than infrastructure players. For most smaller housebuilders, the 2010 outlook is particularly daunting. Many are holding stocks of unsold properties that are proving difficult to sell and have been forced to pick up what work they can and have cut staff against reduced order books. Yet for several of the larger players, like Persimmon, rising house prices – driven by recovering demand – is encouraging new activity. Whilst credit conditions remain tight, it ‘remains cautious’ and has managed down its debts from £1.2 billion to £270 million as a result of strict cash controls, yet has ‘continued confidence in the long-term future of the UK housing market’. Barratt is also resuming construction on eight sites, backed by increased demand. Meanwhile, building products groups, Marshalls, said that although it remained cautious about the short-term outlook, installer order books at the end of October 2009 were an encouraging 8.1 weeks compared to 6.4 weeks for the same period the year before, driven largely by a tentative recovery in the housing market and demand generated by the London 2012 Olympics.
Property
There is some, albeit muted, optimism in both commercial and residential property. Low asset prices are contributing to higher yields on commercial property, attracting investors back to the market. Alan Lovett, Head of Property, Restructuring and Recovery says: “Commercial property with a strong covenant will continue to attract investors, especially as the base rate is expected to remain low for at least the first half of this year.” However, further investment will depend on an overall relaxation of bank funding, which has been particularly fluid in this industry historically. Property company, Telereal Trillium, recently announced it is selling a £475 million portfolio of prime London office space. This signals restoring confidence that buyers are returning to the market. This is not a first, with several overseas buyers, including sovereign wealth funds, having already acquired property in the UK, taking advantage of low asset prices coupled with the decline of sterling against most major currencies. Meanwhile, tenants are seizing opportunities to reduce rates or exit from leases, exerting downward pressure on rents overall. However, those with depressed revenues or low cash reserves, may struggle to meet regular payments to their landlords. In residential property, there are a spectrum of views. On the one hand, the Royal Institute of Chartered Surveyors’ in December said that, despite the increasing number of new instructions, house prices were also rising overall – as demand exceeded supply in some regions, particularly the South East. However, others warn of the risk of a double dip in house prices and a further fall over the next 12 months. Peter Bolton King, Chief Executive of the National Association of Estate Agents talks of a “waitand-see attitude to housing” in early 2010, as potential buyers study what tax changes will mean for them and how the election is likely to play out.
In brief
• No sector ‘recession-proof’ – but some will be quicker to recover • Consumer sectors trading in ‘nonessentials’ still likely to struggle due to cautious spending • Continued recession offers most industrial sectors an opportunity to review stock levels and supply chain efficiencies • ‘Fittest’ businesses in each sector best prepared for recovery
Challenges: Falling sale prices on developments against original land prices are squeezing profit margins; difficulty for home owners to sell existing properties to buy new and first-time buyers to acquire mortgages without significant deposits and the risk of rising interest rates adversely affecting mortgage uptake overall; banks’ reduced appetite to fund developments or guarantee low loan-to-value ratios; maintaining a skilled workforce during periods of low activity. Opportunities: Reported signs of economic recovery should lead to greater consumer confidence and increased purchasing activity; stronger players in the market can increase market share as weaker competitors inevitably fail; unallocated contract opportunities will still exist on London 2012 projects for larger players.
Challenges: Residential property faces variable factors making planning difficult; tougher lending criteria against a slight increase in mortgage availability will impact on demand; commercial property players restricted by the availability of reliable and solvent tenants; the impending General Election will cause uncertainty, impacting on home buyers/investors’ purchasing decisions. Opportunities: Asset prices remain low overall, offering opportunities to those with the cash and the confidence to buy while the base rate stays low; if sterling declines further, more foreign buyers are likely to enter the market; as lending increases prices will begin to creep up.
Alan Lovett Head of Property, Restructuring and Recovery London Tel: 020 7002 8600
Phil Pierce Restructuring and Recovery partner Leeds Tel: 0113 285 5000
8 Outlook 2010
Manufacturing
“Whilst conditions are continuing to improve on the back of recovering world markets and a weaker currency, there is little to suggest that we are in for anything other than a long, slow haul out of recovery.” Chief economist of the Engineering Employers Federation, Lee Hopley, paints a challenging picture. He continues: “Manufacturers have been grappling with extremely difficult trading conditions for more than a year now, but we’re not out of the woods yet and a great deal of economic uncertainty remains.” Although in July, the Government launched a £150 million package to assist manufacturers to take advantage of new technologies, this is relatively small beer and will do little to assist traditional, low-tech businesses. However, 2009 closed with some relatively encouraging news. The monthly Purchasing Managers’ Index (PMI) produced by the Chartered Institute of Purchasing & Supply rose at the fastest pace for two years. The PMI collates, among other things, data gathered from purchasing managers about levels of production and new orders. While one such report does not necessarily signal that recession in manufacturing is over, it does provide some scope for optimism. Russell Cash, one of the partners in our Manchester office involved in the administration of WH Crossley Ltd, a niche manufacturer to the rail industry, says that it is certainly challenging times for manufacturing businesses: “Survival in the current climate depends to an extent on where a business sits in the food chain. Some smaller businesses may find they have little negotiating power and are being squeezed at both ends by customers stretching payments and by suppliers demanding shorter payment terms. Larger businesses may be able to take advantage and dictate terms to an extent.”
Hi-tech
The hi-tech industries, which generate 10% of UK GDP and 15% of UK trade, have been hit hard by the recession. Fund providers, have increasingly been, and continue to be, very selective about which businesses and R&D projects they support. Funders may toughen their approach as they decline to invest new money – which such progress industries rely on – without guaranteed returns or even seek to recover initial investments through the sale of the businesses they have lent to. According to Intellect, the trade association for the UK technology industry: “SMEs tell us that investment funding is still an issue. Traditional sources of cash such as bank loans have been restricted or withdrawn and there is a shortage of venture capital funding. As a result, expansion, product development and other R&D activities are being held back.” Few players in the sector have managed their cash reserves well and rarely allow themselves to try to resolve their financial issues, in often ‘just in time’ pipelines. Where solutions are derived, these are often sales driven, which is usually the area of their business least under their control. In 2009, Graham Bushby, a partner in our Birmingham and Milton Keynes offices, worked on the administration and subsequent sale of Cecure, an online poker gaming platform. Commenting on the sector, he says: “Concerns in 2010 are unlikely to lessen sufficiently. Future worries for the sector include limited access to funding, generally weak and volatile demand levels and a growing range of supply issues throughout the value chain.” Intellect goes on to challenge the UK’s technology framework saying that certain segments of the industry are ‘at risk of being constrained unless a fit for purpose digital infrastructure and adequate support are brought forward’.
Distribution and logistics
The second half of 2009 saw over a quarter of all businesses in the sector make job cuts. However, perception amongst the industry is that job losses for 2010 should be less than in other sectors and the bottom of the recession has been reached for the sector. Over one-third of businesses optimistically expect to see growth during 2010. As the performance of this industry fundamentally hinges on demand from both ends of the supply chain, tough times for both manufacturers and retailers hit this sector hard. This particular recession has been more global in its impact and therefore, the prospect of distribution worldwide has not been available to offset the internal UK slump. Survival remains key for 2010 and the prospect of further mergers and acquisitions by some of the larger players is likely as they aim to grow market share. Those businesses who have viewed the recession as an opportunity to re-evaluate their strategic plan for the future of the business – implementing cost savings and other efficiencies – should find themselves in a much stronger position once the recession formally ends and business levels start to increase. Almost twothirds of UK transport and logistics businesses feel the recession has made their operations more efficient and see other positives, including a greater focus on servicing their customers (34%), according to recent research from Barclays. As with all recessions, the key now for this sector is to ensure that there is sufficient cash to continue to trade when business starts to pick up – in particular, to take advantage of what could be seen to be cheap UK goods being imported into the eurozone following the slump in the value of sterling over the last 12-18 months.
Challenges: Decisions over job losses or less painful efficiencies to improve working capital such as improved stock control; releasing slow-moving stock at discounted prices; greater focus on chasing outstanding debtors; renegotiation of contracts with various service providers wherever possible. Opportunities: Acquisition of distressed competitors to increase capacity or market share; recruitment of best talent from collapsed competitors; ideal time to focus further on customer care and quality assurance.
Challenges: Limited credit available; funders toughening their approaches and seeking ‘guarantees’ against returns; weak demand levels both domestically and internationally. Opportunities: To focus on key business areas and core offerings; potential rewards for smarter sales and marketing drives; chance to review supply chain efficiencies and further reduce unnecessary costs.
Challenges: Heavy dependency on the fate of supplier and customer bases; seeking out new business in an evercompetitive marketplace; maximising working capital and reducing day-to-day operational costs; overseas and UK markets both impacted by global recession. Opportunities: Chance to review or re-assess efficiencies and longer-term vision of the business; M&A opportunities for those looking to acquire distressed businesses in order to grow market share or move into new service areas; a competitive edge when market recovers for those who have made necessary provisions during the recession.
Russell Cash Restructuring and Recovery partner Manchester Tel: 0161 830 4000
Graham Bushby Restructuring and Recovery partner Birmingham/Milton Keynes Tel: 0121 214 3100
Matt Wild Restructuring and Recovery partner Guildford Tel: 01483 307000
www.bakertilly.co.uk
Outlook 2010 9
Sectors (continued)
Retail
Despite the 0.3% fall in UK retail sales for November, according to the Office of National Statistics, and a harsher winter than expected, sentiment in trading over Christmas remained positive for most retailers. Record Boxing Day sales, an impending VAT increase and low interest rates certainly helped footfall and increased retailer confidence. The London market has also been significantly bolstered by eurozone shoppers seeking value outside their home countries. Homeware and big ticket items traded strongly pre- and post-Christmas, as did both luxury stores such as Selfridges with sales up 16% and discounters including Matalan up 13.7%. Next also announced better than expected results for both its stores and Directory business. However, the picture was more mixed across the high street. Despite a first return to sales growth in two years for Marks & Spencer, which had an overall ‘good Christmas’ according to its Chairman, Sir Stuart Rose, its share price still fell by 6.8%. Consumers will undoubtedly rein in their spending during early 2010. With the economy still in recession, predicted unemployment ranging up to 2.8 million, an upcoming election and uncertain tax regime, the consumer economy is likely to start slowly in the first half of the year. Stephen Robertson, Chairman of the British Retail Consortium says: “The impact of the VAT increase is a concern but other clouds are gathering. Customers are cautious, jobs are a big worry and neither will be helped by the tax battering promised by the Chancellor.” Sir Philip Green added that it would be “a very challenging, tough, competitive landscape without change... until the general election is out of the way”. The likelihood is sales will be broadly flat. Customers will continue to seek value and brands that have traded well so far during the recession should continue to benefit.
Motor
At the start of the recession, no other sector suffered as dramatically as car retailing, as an almost instant reduction in demand for new cars caused an immediate flurry of weaker players to leave the industry. The underlying theme for 2009 in the sector was ‘great escape’. New car sales fell by almost 26% in the first half of the year, yet in the second half grew by 21% – thanks to the Government’s scrappage scheme. However, the net fall resulted in the lowest number of new registrations since 1995, according to the Society of Motor Manufacturers and Traders (SMMT). At the end of 2008, manufacturers quickly reduced supplies of vehicles by putting their factories on short working which led to a shortage of product in 2009 and an increase in margins for dealers, as the industry moved away from a ‘pile them high and sell them cheap’ mentality. Additionally, the scrappage scheme increased footfall overall, even though the direct beneficiaries tended to be smaller models and a few suppliers who currently see over 60% of their sales supported by the scheme. “As we reach the beginning of 2010, the majority of the retail motor industry is breathing a sigh of relief for surviving the year – something which looked unlikely in Autumn 2008,” says Graham Bushby, Head of Motor for Baker Tilly Restructuring and Recovery. “But as VAT returns to 17.5% and the scrappage scheme comes to an end in early 2010, the going is likely to get a lot tougher again for the industry over the year ahead.” It’s not surprising therefore, as our second Retailing in the Recession survey with Motor Trader magazine found, the majority of dealerships (59%) do not expect the sector to pull out of recovery until at least early 2011.
Leisure and hospitality
Heavily dependent on consumer spending, the sector will find 2010 another challenging year. Rising living costs, increasing unemployment and jobs uncertainty will all force consumers to keep a close eye on their disposable income and demand bargain offers. Pub drinking declined sharply in 2009, with 11 pubs closing every week in London alone, according to new figures issued by the British Beer & Pub Association (BBPA) – and hitting other regions hard. In response, campaigners for the pubs industry are calling on the Government to reverse the 8% increase in duty on beer imposed after VAT cuts last January, now the 17.5% rate has returned – and to scrap the proposed 2% above inflation increase, in this year’s Budget. Yet, as the Chancellor sees an 84% share of the £8.6 billion total tax and profit on beer sales, this will be a battle. The gambling industries have a mixed outlook overall. Although the ‘recession opportunists’ spend more in downturns and 2010’s major sporting events provide industry optimism, changes to gambling licence rules and the smoking ban were key factors behind Agora, a highstreet chain of adult gaming centres, going into administration with Baker Tilly in late 2009. In contrast, confidence amongst the UK hotel industry is restoring, according to the latest Hotel Confidence Monitor from TRI Hospitality Consulting, with half of hotel managers ‘more optimistic’ in Q4 than Q3 2009, bolstered by Christmas trading. According to Bob Cotton, Chief Executive of the British Hospitality Association, “innovative and sustained marketing programmes, professional management [and] rigorous cost controls” lead to fewer hotel insolvencies than expected for 2009. Last year, Baker Tilly traded and sold a number of high-profile hotels, including The Forbury in Reading and Haleys in Leeds.
Challenges: Maintaining a value proposition for consumers who are facing impending personal tax hikes; public and private sector job uncertainty and expectations of mortgage rate increases in later 2010 will impact on consumer spending overall; 17.5% VAT impact on pricing; rent and corporation tax due in January, March’s quarterly rent ‘roll’ and a less accommodating HMRC. Opportunities: Favourable leasehold renewal climate; lower inventory levels; increasing promotional activities to drive footfall and focus on value.
Challenges: Scrappage scheme coming to an end early this year; the return of 17.5% VAT; a cautious-spending public fuelled by jobs uncertainty and predicted postelection mortgage rate increases. Opportunities: Scrappage scheme has grown market share for certain manufacturers and dealerships to build on; consumers with low personal debt are more likely to purchase brand new vehicles cost-effectively.
Challenges: For hotels, price-sensitivity will result in a decline in average room rates, squeezing margins; business travel looks to be further replaced by networking technologies, such as conference calling; jobs uncertainty and rising living costs increase consumer reluctance to spend on leisure pursuits; the 17.5% VAT rate return is already hitting hard, particularly in the pubs segment. Opportunities: A change in government could lead to a change in tax for the beer and pub industries; a ‘stay home’ mentality during recessions presents continued opportunities for domestic tourism, particularly in regions hit hard in other industries.
Lindsey Cooper Restructuring and Recovery partner Manchester Tel: 0161 830 4000
Graham Bushby Head of Motor, Restructuring and Recovery Birmingham/Milton Keynes Tel: 0121 214 3100
Simon Bower Restructuring and Recovery partner London Tel: 020 7002 8600
10 Outlook 2010
Travel
2010 will be another difficult year for the travel industry, as it relies heavily upon an improvement in consumer spending and overall confidence – according to Baker Tilly, an ABTA travel industry partner. The need for a review of consumer protection will be high on the agenda for the year, in view of recent failures such as Flyglobespan, the collapsed Scottish airline. ‘The unexpected’ – such as terrorist threats and potential epidemics – are also likely to impact on confidence. Whilst 2009 saw a 10% year-on-year fall in passenger numbers, the level was still higher than in 2002, illustrating the level of growth in recent years. Tour operators responded by making capacity cuts to protect themselves, in contrast to the dramatic falls in profit that have hit airlines. The industry generally adapted well last year – but could it cope with a similar fall over the next 12 months? European destinations have been damaged by exchange rates and 2009’s poor euro/pound conversion looks set to continue. The pound/dollar ratio looks more settled at a respectable 1.6. Agents will be looking for continued growth in e-sales and observers will be interested to see how the industry utilises new media, such as social networking, as a marketing tool. The World Cup, Winter Olympics and Ashes will all ensure a bumper year of sports travel in 2010 – however, inherent to this will be the growing risk of fake ticketing scams and uninsured travel packages. Mark Wilson, a partner in our Watford office comments: “Innovation and highly competitive marketing activity will undoubtedly be key for survival, together with a strong focus on the end consumer, as the industry aims to restore public confidence.”
Professional practices
‘Best in class’ professional practices, having staked out a strong market presence and respected position in their chosen markets, are likely to fare better in 2010 than their competitors – unless their specialism happens to have been recession-hit, such as conveyancing. Consolidation among the stronger firms looks likely to continue, as the main players seek out attractive acquisitions. Whether in accountancy or law, two weaker firms may add up to a stronger one. Alternatively, combining complementary skills, while reducing administration and other overheads, can ensure a profitable future. Without doubt, the single biggest concern for the year should be cash. Firms need to be invoicing clients as early as possible, chasing receivables efficiently with every effort made to haul in cash. With plenty of calls on clients’ scarce resources, creditors that make the most noise are most likely to get paid. Inventory management and timely, even daily, management information will therefore remain crucial to keeping a tight grip on the business. With HMRC still ranking high among many firms’ creditors and tax bills due on 31 January 2010, now is also the time for them to consider whether it is necessary to apply to HMRC under the Business Payment Support Service to arrange more time to pay tax bills. The sector should hold up fairly well but is not recessionproof, as evidenced by more firms going out of business during the last recovery than in the preceding recession and a predicted rise in insolvencies for 2010, particularly at the smaller end of the spectrum.
Charity and not-for-profit
The ‘third’ sector appears, in the main, to be weathering the current economic downturn relatively well. However, it can expect tougher times in the next 12 months with no anticipated marked improvement until the second quarter of 2011, according to our recent survey Managing Charity Finances Through Uncertain Times. Some of the larger charities have seen a modest decline in donations, yet smaller organisations continue to maintain their existing income from their loyal donor base. Not surprisingly, organisations that relied on high interest rates and dividends for income are finding themselves with increasing cash pressures – but many are positive about this turning around in 2010. With the economic climate as it is, there is also a decline in corporate giving. However, this may give rise to the opportunity to boost volunteer numbers and provide additional commercial support for charities which the sector would welcome. Government funding will have a major impact in 2010. The sector anticipates a reduction in the amount available and it is also thought that there will be a move from traditional revenue funding to more project-specific based funding. Charities must price projects accordingly and cover all associated overhead costs to ensure that these projects do not cause a drain on existing cash reserves. Charities who are successful in attracting funding will increasingly have to demonstrate their social impact i.e. for every £1 of funding provided, how much value is given back to the community – in short, what is their social return on investment?
Challenges: Strongly dependent on overall consumer confidence; trend towards ‘stay home’ vacations in the UK; strength of the euro against sterling; anticipated increase in unemployment leading to consumer hesitation in making bookings; expected increases in mortgage rate in late 2010 will impact on consumer spending. Opportunities: Promote non-eurozone destinations, such as Turkey; online sales still present an opportunity; consolidation to increase market share; long-term prospects for the industry still remain strong overall.
Challenges: Maintaining clients in an extremely competitive market; decisions over staffing levels to ensure production levels can be maintained and opportunities grasped, at the same time ensuring recovery rates are maximised; working capital remains key so timely billing and debtor collection are vital. Opportunities: Current downturn and the accessible resource pool represents an opportunity to diversify into new markets; acquisition/merger with distressed practices to enhance specialisms offered and gain entry into new markets.
Challenges: Putting in place and acting on plans early to counteract the anticipated shortfall in government funding or annual income; seeking out new sources of income, particularly where heavily dependent on just one or a few streams; planning ahead whilst also dealing with current challenges. Opportunities: Forming working alliances and mergers with other charities to potentially reduce costs and ensure a sustainable future; an opportunity to review services offered as well as fundraising programmes to focus on the most productive activities; a good time for reviewing and renegotiating contracts.
Mark Wilson Restructuring and Recovery partner Watford Tel: 01923 816400
Tony Wright Restructuring and Recovery director London Tel: 020 7002 8600
Karen Spears Head of Charities, Restructuring and Recovery Watford Tel: 01923 816400
www.bakertilly.co.uk
Outlook 2010 11
Baker Tilly
Baker Tilly is a leading independent firm of accountants and business advisers that specialises in providing an integrated range of services. We provide our growing and established business clients with audit, accountancy, personal and corporate taxation, VAT, management consultancy, corporate finance, IT advisory, restructuring and recovery and forensic services. The firm has national coverage through its network of offices and is represented internationally through its independent membership of Baker Tilly International.
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Baker Tilly UK Audit LLP, Baker Tilly Tax and Advisory Services LLP, Baker Tilly Corporate Finance LLP, Baker Tilly Restructuring and Recovery LLP and Baker Tilly Tax and Accounting Limited are not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services because we are members of the Institute of Chartered Accountants in England and Wales. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. Baker Tilly & Co Limited is authorised and regulated by the Financial Services Authority to conduct a range of investment business activities.
