TMA (UK) Annual Conference 2011
Conference slides and presentation material
Slides and presentation material from the TMA (UK) Annual Conference can be downloaded here. Note: Only delegates who attended the conference are able to access these files.
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Making a splash? Preparing for a double dip
By John Willcock, Editor, Global Turnaround
Insolvency appointments may be falling to historic lows, but the 130-odd TMA UK members who attended the annual conference on 11 November echoed Noel Coward's 1930s song: "Bad times are just around the corner."
To which one panellist retorted, with black humour; "Which sounds like good news." In terms of work for turnaround people, of course.
Whether or not the Government spending cuts, more turbulence in the sovereign debt markets and a possible rise in interest rates will push the UK into a 'double dip', and most panellists reckon they will, it looks like more work for TMA members of every description.
Bryan Green of Gordon Brothers, entering his second year as President of TMA UK, reminded the packed lecture hall at The Royal College of Physicians that the TMA "is not a trade association representing turnaround managers; we represent all parties involved in the turnaround process."
This was illustrated by the make-up of attendees, which included private equity investors, lawyers, insolvency practitioners, ABL lenders and bank workout executives, as well as turnaround and interim managers of every description.
The conference theme was 'Still in denial?' This did not apply to the attendees, who wasted no time in wading into the debate about what is happening to distressed businesses in the UK and how much, and what kind, of work they can expect over the next twelve to eighteen months.
Luke Johnson, the serial entrepreneur and newspaper columnist, kicked off the day retelling his turnaround exploits - "they happen so quickly, it's very exciting." He said that originally he never had any plans to become a turnaround manager, it just came with the territory of being an entrepreneur. This started with the first big business he bought into, Pizza Express.
Johnson immediately won the approval of attendees by describing the priority he attached to operational change. For instance, he said, "of all the restaurants in the Pizza Express chain, the one that looked like it would never make a profit was the Oxford outpost, the worst of the lot. Six weeks after we bought the business and started our changes, it became the most profitable of the lot.
“That was all down to the operators, and it was a big lesson for me," said Johnson.
He also had a book tip: 'The Turnaround Kid' by Stephen Cooper, the highest profile turnaround manager in the US of his generation, who grappelled with Enron, GM, MGM and a host of other big iconic corporates over the years. "An excellent read."
Johnson concluded that what attracted him to turnaround was that it was higher risk than other investments but also promised a higher potential award.
While much of the focus was understandably UK and mid-market, there was an acknowledgement of the relentless pace of globalisation, and how even small turnarounds nowadays can have an international component.
The first keynote lecture was a double hander between Alan Tilley, of Bryan, Mansell & Tilley, who is currently on the international board of TMA, and Carlos Gila, who told the conference how they turned around La Seda, a big Spanish chemical products group with operations in Spain, the UK and across most countries in Europe. They had to deal with administrators in the UK and a varied range of international creditors.
One of the most striking statements came from Graham Rusling, well known to members as Barclays' managing director of business support and recoveries in the corporate bank since 2002.
Rusling told the conference that "for the last twelve years we have looked at the level of cases coming into the workout department at the beginning of September, when everyone gets back from holidays and has a look at the accounts. You normally get an uptick of cases, just because of that phenomenon. This September, for the first time in twelve years, there was no uptick."
“Something different is happening."
So even though panellists were predicting big problems for businesses and more work, crucially, this is not being flagged up so far by traditional indicators. There was agreement that the current economic background is anything but 'traditional'.
Stimpson reckoned we would start to see more insolvency and restructuring work in a couple of year's time, but then once it arrived it would also last for a number of years. Contributory factors would be a reluctance on the behalf of HMRC ton continue its 'time to pay' support, a rise in interest rates and the Coalition Government cuts, which would be spread over three years. "No explosion," said Hart, "but a definite uptick."
One important point to emerge from the bank workout panel was that the banks are ready and able to lend, to small as well as large businesses, as long as the terms are right. As Adrian Doble of FRP, remarked to attendees after the panel, "if only we could pin Vince Cable up on the screen by his ears, he would be able to hear that the banks are trying to lend, and are open for business."
Doble was co-chairing the conference with his FRP colleague John Bloor. Tony Stimpson of RBS, also on the workout panel, said they were prepared to do debt for equity swaps for distressed borrowers, but valuation was always difficult. Chris Hart of LloydsTSB predicted more interest in this are from private equity. Rusling stressed that while Barclays was also prepared to do swaps, and now had stakes in around 40 companies, "we don't want to own businesses. But we do want to preserve jobs." All the bankers agreed that once a swap was completed, selling the businesses was a priority.
Two senior members of the US side of TMA had flown in specially to attend the conference, Linda Delgadillo from the TMA secretariat, and Mark Indelicato of Hahn & Hessen, a New York-based bankruptcy lawyer who is set to be the next President of the TMA. "It's exciting to see real progress being made on a pan-European structure of TMA," said Indelicato. Tilley has been a driving force behind the annual TMA European conference. The next will be held in Helsinki on 9 June, and Finland's chapter leader Christian Jakovlew was also at the conference to help get preparations underway. "We are having a Russian keynote speaker, which should attract delegates from the US," said Jakovlew, "and we are also planning a trip to Saint Petersburg."
Meanwhile, back in rain-sodden London, Richard Fleming of KPMG described his recent experience with CVAs. There has been some criticism from commercial landlords that CVAs do not adequately take into account their interests, but the banking panel at the conference said they did not share these criticisms.
In contrast, TMA members have long been advocates of the CVA process as an alternative to administration. Convincing stakeholders of the merits of the process depends on effective communication. KPMG's Fleming compared the advantages of CVAs to administration in terms of preserving value. He referred to successful CVAs that he has been involved with, including Blacks Leisure, how even reluctant landlords can be persuaded that value can be preserved better by coming to the CVA table and displaying consensual pragmatism above enforcing legal rights in a formal process.
What with all the talk of economic doom and gloom, attendees welcomed the session by Guy Browning, a humourist who writes for the Guardian and is a regular on Radio 4. Presenting himself as a 'business consultant', he used a very impressive looking power point presentation to illustrate the financial record of his own business; the red columns showing ever bigger losses were transformed to show ever bigger profits, by the simple expedient of turning the graph upside down.
Simple stuff, but most financial frauds, such as Ponzi Schemes, aren't that much more sophisticated. The audience certainly enjoyed Browning's tongue-in-cheek review of current business practices.
Will Wright of KPMG and Simon Sherliker of Barclays took attendees through a workout from Barclays' perspective; John Childress of Principia Associates spoke about leadership and process port restructuring, while Jon Gatfield of Alvarez & Marsal described "a five point turn for buses; driving a performance turnaround in London's private bus operator.
Trades unions; Enemies or stakeholders? We're dealing with turnarounds the wrong way around
There was a surprising amount of unanimity at the TMA UK conference that banks, lawyers and investment bankers are concentrating too much on financial restructurings at the moment, at the expense of operational turnarounds.
“Fix the operations, and the finances will fix themselves," declared Allan Tilley, of Bryan, Mansell & Tilley, who sits on the international board of TMA.
The problem is especially acute in the UK, perhaps because of the preponderance of the financial sector in the City of London. Large teams of expensively remunerated advisers are battling each other to put together competing restructuring plans up and down the capital structure, while the actual underlying business is left to wither on the vine.
The result is a generation of zombie businesses, which have had their balance sheets tampered with but whose operations either need deep surgery or even liquidation.
This wave of condemnation came during a panel discussing the proposition: "The CRO; value for money in restructurings?" The panel was moderated by me.
The subject was CROs; what are they, who appoints them, and who should they work on behalf of? The panel represented an important step for the TMA UK in this area; it was the first time a trade unionist had been invited to speak at the annual conference. Frank Sheppard from UNITE had been contacted by Tony Groom, a director of TMA UK, and was eager to represent the importance of workers' rights to turnaround people, and to urge the merits of cooperation over confrontation when trying to save a business.
Employees are part of any turnaround, and Sheppard argued that CROs should give them as much priority as other constituencies like creditors or shareholders. This is a live issue for the many operational turnaround managers who make up the TMA UK membership and who need to carry employees with them when they go into a company on the verge of collapse.
This 'we're all in this together' attitude won support from the rest of the panel, not least Steve Norris, former London Mayoral candidate on behalf of the Conservative Party. As well as being heavily involved in the Jarvis case, Norris now runs Project Associates and works with many distressed as well as healthy businesses.
Also on the panel were several leading members of the turnaround community; David Lovett of AlixPartners, Murdoch McKillop of Talbot Hughes McKillop and Julian Cooper of MPC Partners.
Lovett, EMEA head of restructuring for AlixPartners, declared: "Neither Woolworth nor Rok should have gone into insolvency."
Interestingly, Lovett did not blame the banks or the insolvency practitioners for either of these debacles, but rather management, which had buried its head in the sand and refused to ask for help before it was too late.
Defining what CROs actually are was important, since the term originated in the US, where it has a precise technical definition, whereas in Europe and Asia it has been used to describe many different things. McKillop said it was vital to understand the difference between operational turnarounds and financial restructurings; "Many companies at the moment have the wrong capital structures, and that is all that needs to be fixed."
Too many other companies, he added, needed operational turnarounds but were not getting them. This prompted the rest of the panel and the audience to agree that there is too great an emphasis in the UK at the moment on purely financial fixes, while the operational problems are ignored. This in turn was creating a generation of zombie companies, some of which needed fixing, others winding up.
Lovett also stressed that the CRO is always an addition to the incumbent management team, never a replacement. The CRO has to be on the Board and an integral part of the management team, but at the same time an adviser who can shoulder the crisis-handling role of dealing with multiple stakeholders and the like; "The idea is to take care of the restructuring and turnaround side, so that the management can get on with the day-to-day needs of the business," said Lovett.
There was also unanimity from the turnaround people on the panel that the CRO represents the company, not just a single investor or creditor, however preponderant. "The CRO title should never be polluted," warned Lovett, by being used to describe new management that is parachuted in by distressed investors, for instance.
Julian Cooper added that the role of private equity is also on the increase in appointing CROs. "Hitherto, many PE firms had no idea that CROs exist. That's changed a lot in the last two years," said Cooper. It used to be the PE executives behaved like turkeys who didn't want to vote for Christmas. Now they are more willing to bring fresh eyes to a situation.
Norris agreed that the PE model had resulted in many businesses being crushed by debt, and more PE firms as a result were looking to restructure the business itself, created more opportunities for CROs.
The Conference concluded by Bryan Green reiterating that the TMA's role was to bring all constituencies in the turnaround process together, and reaching out to the trade unions was an important part of this. Such enlightened attitudes will be important as everyone prepares for the forecast increase in work in the next two to three years.
Conference slides and presentation material
Slides and presentation material from the TMA (UK) Annual Conference can be downloaded here. Note: Only delegates who attended the conference are able to access these files.