Top 5 insolvency & restructuring predictions: Increased deal activity

To the surprise of many practitioners in the sector, purchasing of distressed assets from administrators and insolvency office holders was muted in 2023. We think 2024 will be different.

There are no shortages of problems for UK businesses. Pandemic closures made a major dent in revenues; Brexit cut off access to overseas staff, and complicated imports and exports; the Ukraine war lead to supplies of grain and oil being restricted with resulting price hikes; structural changes in retail and office use have left many businesses non-viable; a massive jump in interest rates has pushed financing costs through the roof…and the list goes on.

And yet the number of administrations (being the main business rescue tool for trading businesses) is only at 2019 levels. Anecdotal evidence from our experience and others we have spoken to, suggests that those administrators selling assets are getting prices below expectations.

So why will 2024 be different? We think there are a few reasons:

Delayed effect of interest rate rises: The impact of interest rates can take a while to filter through. Businesses on term loan financing will wait until the end of the term. They will find refinancing expensive and possibly unavailable.
Delayed effect of the cost of living crisis: Consumers can take a while to adapt behaviour to reflect lower disposable income. As consumption in some sectors declines, it will affect consumer businesses. However, the negative impact will have a ripple effect- reducing activities of B2B businesses that supply them- and easting through cash reserves.
Mounting pressure: As mentioned above, there are lots of pressures on businesses. Many practitioners have noted an increase in enquiries from concerned businesses. There will be a time lag between the initial enquiry and an asset sale while plans are formulated, valuation and marketing are conducted, and other formalities attended to. Many of these processes will not be completed but many others will result in deals.
Nearing the bottom of the curve: The above factors all relate to supply of distressed assets. But demand will also increase. With a drop in interest rates in the US, the same may follow in the UK. That expectation may start to make cash deposits less attractive for investors and, as deal activity increases, push up prices. Not wanting to miss out before prices raise too high, investor may rush to snap up bargains and in doing so accelerate the distressed asset price rise.

Hopefully, this increased deal activity will benefit the economy, putting assets in the hands of better capitalised owners who can build value, create jobs, and drive innovation. That will spread benefits for many.