There is an enormous sense of déjà vu at the moment. The emergence of new coronavirus strains, the spikes in cases and the introduction of new restrictions have highlighted that, whilst many economies have moved into a recovery phase, leading to strong economic growth, recovery will not be smooth nor consistent across certain sectors.
What has been surprising to most is that the expected volume of restructurings has not materialised. Many in the restructuring world have said that either everyone is right, and it has been a combination of lots of liquidity, low cost of borrowing and continue support measures provided by governments, that have delayed the inevitable, or that everyone is wrong and businesses will benefit from the increased consumer spending with economies returning to pre-pandemic levels next year.
Whoever is right, the concept of “post-pandemic” still seems some way off. It feels like we have been here before. The positive news is many economies (but not all) will be in a much better position to deal with this; a large proportion of the population are vaccinated; business is more able to work remotely; and retailers have invested in online platforms.
The interesting question from a trustee and employer perspective is to identify lessons learned from last time and what should the focus be as we continue to see bumps in the road towards a more stable recovery:
Transparency and positive engagement – employers, trustees and their stakeholders have been on a journey over the last 18 months. In general, it feels that parties have worked together with a common goal, in a transparent and collaborative way. Solutions to problems are easier to find when they are understood and shared and we have seen the best outcomes where this is done early.
Not all sectors are impacted – there are many businesses that have been able to adapt, do things differently, or seen increased demand as a result of changes in their markets and therefore protect their covenant. These businesses are more likely to be able to withstand the impact of further restrictions, but it is important to remember, like us, they are not immune. Those that remain flexible and nimble will again be able to deal with the effects of any further changes in their markets.
Funding sources – there are various reports and surveys that suggest that some sectors will be grappling with much high debt burdens than would have be the position pre-pandemic. It will be important for trustees to understand how businesses will access liquidity in the event of disruption. For larger businesses with access to capital markets this may be easier, and therefore it is important to understand what options exist.
Don’t reinvent the wheel – the last 18 months have been challenging, with many hours spent between sponsors, trustees and their advisers understanding the dynamics and risks within their covenant. As professional trustee, we have seen well-considered and robust support frameworks put in place and we would expect these to provide flexibility (both ways) and remain fit for purpose.
Collaborate now – it is important to continue to engage with sponsors and monitor how they are being impacted and their journey as they stabilise, recover and grow. This will always need to be proportional and is best done with the support and engagement of the sponsor.
Continue to engage with the Pensions Regulator – the Pensions Regulator is a critical stakeholder for both trustees and sponsor, especially in light of its increased powers that did not in exist at the start of the pandemic. Distress generally requires solutions to be found at speed, and therefore ensuring that they are kept informed of developments will help manage timelines and execution risk for all parties.
The real challenge will be for those businesses that have been unable to adapt and who are not in a better position than last Christmas. For stakeholders of those businesses it will be important to understand the ongoing challenges, what solutions are available and how to protect value.
In these situations, where situational experience or more time is required to support the workload, there is real value a professional independent trustee can bring by helping manage and prioritise the critical issues and optimise the input of the other trustees. One of the key advantages this brings is the ability to share successful strategies and innovative solutions.
As a professional independent trustee, it is clear the environment is becoming ever more complex and demanding, but it is for these reasons that I decided to become one.
This article was first published in Professional Pensions, December 2021
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