Company doctors reap recession bonanza
Business restructurers Zolfo Cooper are knee-deep in work, and it shows no sign of letting up, they tell Simon Evans
Sunday 29 March 2009
The headlines are horribly familiar: "Retailers on the brink as painful rent day looms"; "Insolvencies set to soar in 2009"; "Billions to be raised in rights issues this year."
But for the select band of company restructuring experts, largely anonymous during the bull market but now in huge demand, these troubled times are manna from heaven. The restructuring boys are going gangbusters and there's little to suggest the good times are likely to end anytime soon.
Sat near the top of the restructuring pile is Simon Freakley, chief executive of Zolfo Cooper in Europe. The firm was created by a management buyout of the business from Marsh & McLennan Companies, the insurance giant, in November. While the timing of the sale was probably as bad as it could have been for Marsh, for Freakley and co, it couldn't have been better.
"Last spring, Brian Duperreault, chief executive of MMC, took a look at the suite of businesses at the company and decided restructuring was not a core activity," says Freakley. "We said we'd be interested in buying it and the deal was substantially done by the autumn. The timing was certainly fortuitous for us."
Unlike the plethora of private-equity-financed deals hitting the skids at present, the acquisition was funded from the partners' pockets. Freakley refuses to say how much he and his colleagues paid, but the wry smile on his face suggests a snip.
Freakley now runs a business with more than 200 staff and has plans to swell that number by more than 20 per cent in the coming 18 months.
The group has worked on some of the highest-profile restructuring and insolvency cases in the past year, including the collapse of Wagon, the motor parts maker, and XL Leisure, the airlines-to-holidays company that folded in September, leaving thousands of passengers out of pocket.
"There was a perfect storm of spiralling costs – in particular the oil price – and plunging demand, that hit the airline industry last year," says Nick Cropper, the partner responsible for dealing with the XL collapse. "XL was a highly leveraged company with a difficult debt and guarantee structure. Plus it had the added flavour of Icelandic bank backing. We really tried to give it a chance but it didn't happen." He added: "I think we could certainly see more failures this year."
The collapse of Wagon, which employed nearly 5,000 people, came after a similar, perhaps more violent, storm swept through the motor market.
"Wagon went through a refinancing process last summer but the deterioration in the vehicles market in the following months was so great we were called in," says Alastair Beveridge, who has worked on the company since December. "Wagon's main customers were Peugeot and Renault and their order volumes crashed by 30 per cent, and we predicted another 30 per cent fall in 2009. It was very difficult."
Beveridge and his team have since sold off chunks of the business but the rump remains unsold.
He is also still looking for a buyer for the dealership arm of Camden, an auto business that boasted a turnover of nearly £1bn last year. "We sold the fleet management arm to Paragon but the dealership hasn't been sold," says Beveridge. "Things are terribly difficult. There's no support."
Zolfo Cooper's dealings in the motor arena have also highlighted the different insolvency regimes across Europe. "In France, it's all about employment protection," says Beveridge. "In Germany, things are made easier because there is a social protection fund that pays employee wages for three months. The insolvency system in the UK is all about getting value for creditors."
With so many administrations currently in train in the UK, Freakley and his team agree that insolvency practitioners and restructuring experts are facing unprecedented scrutiny.
"The profession is in the spotlight," says Cropper. "But on the whole, the insolvency business is good at self regulation."
One area of the industry that faces particular criticism is the use of so-called pre-pack administrations – revolving-door deals where a buyer is lined up for a struggling business before it goes into administration. High profile pre-packs that have hit the headlines of late include retailer USC and snooker-clubs chain Rileys.
"There is a lot of confusion about pre-packs – they assume all pre-packs are phoenix deals, [where the original company's owners dump creditors through administration and buy back assets afterwards] which they are not," says Beveridge. "The major advantage of pre-packs is that they preserve employment. That gets lost in the noise."
Cropper adds: "The key is information. Though XL Leisure wasn't a pre-pack, we wrote to a number of MPs to keep them abreast of what was happening. It's important to engage stakeholders such as MPs because when you see them on TV criticising something, when they patently don't have all the facts, it can be hugely damaging to a restructuring process."
If there are howls coming from creditors, many of the companies involved in the restructuring process have voiced their anger at the costs involved in the business of corporate doctoring.
The issue of banks profiteering from difficulty has hit the headlines, but Beveridge has little sympathy with firms crying foul. "When the markets were buoyant there was a vast amount of easy finance," he says. "There was an assumption that money would always be easy. But the recession has proved otherwise, so those corporates looking to borrow more cash are being hit with fees. The banks are rightly charging these fees. A lot of the criticism is unfair."
Aside from its core restructuring business, Zolfo Cooper also operates a pensions business, which offers advice on fund deficits. "We advised on the Sea Containers failure and its pension deficit issue," says Beveridge. This was a landmark case in which Britain's pensions regulator issued a financial support notice that held in a US court. "Private equity investors overseas that own UK firms with pension funds probably slept less well after that deal," he adds.
With corporate distress unlikely to let up, Zolfo Cooper is set for a heavy workload. Beveridge says: "We haven't even hit consumer-credit problems that hard in the US yet and that's potentially much bigger than the sub-prime mortgage problems."
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