KPMG and Deloitte ‘corporate undertakers’ make their move as Irish businesses face triple threat

Joe Brennan: Might upcoming wave of troubled companies be handled differently to the post-crash victims?

As Covid-19 swept the globe in early 2020 and businesses in lockdown scrambled to get forbearance from suppliers, banks and tax collectors, many put another group on speed dial.

"Over the course of that April to June, I had more calls in relation to struggling businesses than I'd had in my career in such a short a space of time," recalls Neil Hughes, insolvency practitioner and managing partner of Baker Tilly Chartered Accountants in Ireland, who has more than two decades experience in the field. "About 60-70 decent-sized businesses would have been in touch with us."

In Ireland alone, the pandemic served as a catalyst over the course of a few months for a number of liquidations, including department store chain Debenhams Ireland, the Irish arms of fashion outlets Oasis and Warehouse, and the Usit travel group.

Rescue

Elsewhere, airline CityJet required examinership and Cartrawler, the Dublin-based travel software company, had to secure €100 million in rescue financing.

However, most of the anxious business owners and company executives that called restructuring and insolvency gurus (the crash teams or undertakers of the corporate world, depending on the outcome) held off on pulling the trigger, thanks to unprecedented pandemic government subsidies and supports to keep enterprises alive.

While there was a marginal, 1 per cent, uptick in Irish company insolvencies in 2020, the 401 business collapses recorded last year marked a 29 per cent slump on 2019, before the virus struck, according to Deloitte Ireland.

A glance across the Irish Sea, where the UK government phased in business supports in the fourth quarter, gives an indication of where things are heading here as the likes of employee wage subsidies and a tax debt warehousing scheme are phased out in the coming months.

PwC estimated this week that the billions of euro of – borrowed – money the Irish Government pumped into businesses has helped save at least 4,500 companies from going bust.

But it reckons there is a debt overhang of at least €10 billion that companies now face having to deal with, including warehoused tax debt, loans in forbearance, supplier debt, rents and rates.

Many companies that have remained on life support for the last two years now face what Hughes calls a triple threat: the effects of the pandemic on their business; a spike in material, energy and labour costs since economies started to reopen; and an inevitable increase in interest rates as central bankers tackle inflation.

Could we see Irish insolvencies spiral back up towards the crisis-era high of almost 1,700 in 2012?

Certainly, some of the biggest names in the business are getting ready.

It emerged last week that five top corporate restructuring experts at KPMG Ireland and Deloitte Ireland have handed in their notice and plan to join forces to set up an Irish operation of UK-based debt restructuring boutique Interpath Advisory.

They include KPMG partners Kieran Wallace and Eamonn Richardson, probably best known as the joint liquidators of Irish Bank Resolution Corporation (IBRC), formerly Anglo Irish Bank, and Deloitte partners Ken Fennell, Mark Degnan and James Anderson.

Cases

Fennell and Anderson are the joint liquidators of the Irish arm of German payments company Wirecard, which collapsed in 2020, while Fennell and Degnan are joint liquidators of Stobart Air, among others.

Any outstanding liquidation cases are on track to move with the individuals to the new practice, as they are court-appointed officials in each instance.

Interpath Advisory was established in May last year as KPMG in the UK sold its corporate restructuring business to private-equity firm HIG Capital for more than £350 million (€414m). HIG Capital would not be committing money to the Irish market if it didn’t see a big opportunity.

KPMG UK’s spin-off of its restructuring practice, as well as a move by Deloitte UK last year to sell its restructuring services unit to US public relations and advisory form Teneo, reflect how difficult it had become for star restructuring gurus to win new business within the Big Four firms, with all the conflicts of interest checks and balances involved these days.

They are also taking place against the background of the UK Financial Reporting Council having given the accounting giants until 2024 to execute an operational separation of their audit units from other business. It follows on from high-profile collapses in recent years of construction and outsourcing group Carillion, and retailer BHS, amid perceived shortcomings of auditors.

While the Irish Auditing and Accounting Supervisory Authority (Iaasa) is not of the view that audit unit splits are the way forward, developments in the UK are beginning to spill over.

Sources have said that Deloitte Ireland is in talks to sell its corporate restructuring and insolvency practice, which has about 60 staff, into the planned new Interpath Advisory Ireland business.

While KPMG Ireland moved last week to appoint Mark Collins, the firm's head of deal advisory, to head up its restructuring unit and say that it remains "fully committed to the future of this business", there are major questions over how big it will be in future.

The Irish Times reported on Friday that Alvarez & Marsal, the New York-based international management consulting firm, is considering establishing an Irish corporate and restructuring practice.

Jurisdiction

Elsewhere, Teneo hired Damien Murran, formerly of the Irish operations of RSM, EY and Grant Thornton, last summer to build up a restructuring practice in Dublin to add its growing international network in this area. Murran is expected to build up a team of 20 within the next 12 months.

The growing interest in the Irish restructuring sector is also being fuelled by efforts in recent years – albeit driven by the legal profession – to turn the Republic, the only English-speaking common law jurisdiction in the EU, into something of a hub for cross-border corporate restructuring.

But the bread-and-butter fees will be from the post-pandemic wave of business trading and debt problems coming down the tracks.

Still, some experts reckon the mess will be handled differently to the post-crash years – especially with the Government’s recent launch of an “examinership-lite” for struggling SMEs.

“There will be insolvencies. However, I think we’re going to see way more restructurings in the next phase,” says Murran at Teneo. “All stakeholders have more knowledge and experience as a result of the financial crisis to take a different approach to help businesses that have a viable future.”