How to address the imbalance sheet 

Government enforced initiatives have led to a substantial increase in the level of liabilities on the balance sheets of UK corporates. Martin Gray, managing director at Restructuring Advisory practice, Kroll guides on how MD’s can navigate the challenges 

Debt driven stabilisation

Over the past year the UK corporates have been supported by a stream of government enforced initiatives designed to stabilise and support businesses during the height of the COVID-19 pandemic. Most of the available support has been through various debt products including CBILS, CLBILS and BBLS which are government backed sources of finance that were made available to eligible businesses through to March 2021.

In addition, temporary and permanent changes in legislation over the last 12 months have sought to provide directors and corporates with additional protective measures, which in turn have prevented a significant level of insolvencies from occurring.

The consequence of the various initiatives that have been provided since the outset of the pandemic has ultimately led to a substantial increase in the level of liabilities on the balance sheets of UK corporates. This necessary liquidity has largely been obtained through extending credit lines with HMRC, suppliers and landlords, and through increased bank borrowing. All of this must be repaid by businesses over a relatively short period of time and at a point when there remains an inherent level of uncertainty over the outlook of the market.

Martin Gray, managing director, Restructuring Advisory practice, Kroll

What next?

It is critical that corporates maintain regular communication with their key stakeholders to ensure they all remain informed and supportive of the direction being taken.

It is imperative that directors proactively plan for the challenges ahead as they navigate their way out the other side of the COVID-19 pandemic. As they do so, it is important to consider the make-up of their balance sheet, how it has evolved over the past 12 months and what actions need to be taken to address that imbalance.

In most circumstances, the level of current liabilities has disproportionately increased to a point where the level of support from these stakeholders has been maximised and the expectation is that they will actually begin to unwind within a relatively short period of time. However, realistically this may not be possible for most corporates depending on the sector, liquidity status and profitability levels.

Therefore, where necessary, directors should consider the options available to restructure the balance sheet to become more aligned to the cash flow needs of the business. This may include reducing or normalising their current liabilities with a more manageable longer-term debt solution.

This could be possible through traditional sources of finance and/or a recapitalisation through equity means. However, in certain circumstances neither of these options may be available or deemed suitable.

As a consequence, the government has announced a new Recovery Loan Scheme which is designed to help businesses of any size as they grow and recover from the disruption of the pandemic. This is a government backed loan scheme supporting borrowing of up to £10m for individual businesses and up to £30m across a group. The use of these proceeds can include cash flow management, growth, and investment.

We therefore recommend directors complete a critical assessment of their business to ensure timely and appropriate action is taken towards creating a stable platform that can financially support and safeguard the longevity of their business.