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Supply chain risk management: life after COVID-19 - living without life support

  • Global
  • Banking and finance
  • Distressed - Stressed financing and special situations

22-09-2021

Fiscal Stimulus 

The global pandemic sparked the largest global fiscal response from Governments across the world to preserve infrastructure, supply chain, business and jobs.

In the UK the government support has been widespread with the Office for National Statistics reporting that the national debt has increased to £2.2 trillion to the end of July 2021. The extent of the support provided to business has been broad and encompasses tax payment deferrals; furlough support in relation to employees; government backed loan schemes amounting to £80 billion of lending support; together with other relaxations and prohibitions on creditor action designed to stimulate the bounce back effect post COVID-19. 

The combined effect of the fiscal stimulus and protections has created an artificial and benign environment where the risk of insolvency has been removed by the prohibition on creditor action meaning that there has been no immediate insolvency “trigger event” for a COVID impacted business.

Post COVID-19 Re-Set

The success of the vaccine role out across the globe has driven a desire to return to normal trading conditions which in turn is feeding an expectation from Government and creditors that business will return to pre-COVID-19 levels without the life support of continuing COVID measures. As a result there is an expectation amongst trade creditors, landlords and lenders that there will be an automatic re-set as soon as support measures and prohibitions are removed.

Reality Check

Sadly the reality of the position is that the pandemic has created many other supply chain issues which business are struggling to manage and which heavily impact financial performance.

We have already seen the steep rise in shipping costs (especially from China to Northern Europe); the labour shortage particularly in respect of skilled workers which is now a global problem; and the increasing surge in energy costs. Likewise, in the UK we have seen stresses in the construction industry where there has been a shortage of materials and a consequent increase in the price of materials; logistics where there is a shortage of qualified drivers in the supply chain; and the automotive industry where the dearth of semi-conductors is inhibiting vehicle manufacture. It is estimated that 5 million vehicles will not be built in 2021 which could have been built and sold if semi-conductors were available. This simply adds to the global chip crisis affecting many sectors and which forms an essential part of the manufacturing process for so many products.

It is clear that the impacts of the pandemic are wide ranging, continuing, and have a significant impact on the ability of any business to return to pre-pandemic levels.

Trigger Events

The ending of government support measures now creates multiple touch points which could give rise to an insolvency trigger event. The ending of furlough support means that business has some hard decisions to make in relation to the size of its workforce.

This is in addition to the fresh double whammy presented by the withdrawal of Government support which has created an insurmountable debt pile for many companies which benefited from government backed loans and tax deferrals (which now need to be repaid) coupled with the ability of creditors to take action for recovery from 30 September 2021.

Whilst landlord action has been pushed out to March 2022 there is now a very real threat of creditor pressure with the prohibition on winding up petitions expiring on 30 September 2021.

The combination of COVID-19 support expiring together with the current market conditions make it inevitable that there will be a far greater risk of insolvency trigger events occurring in the supply chain from 1 October 2021.

Creditor Pressure

In relaxing the restriction on winding up petitions the UK government has sought to protect small businesses by raising the financial threshold for a petition from £750 to £10,000 or more and requiring a creditor to give a company at least 21 days to make proposals for repayment (to the satisfaction of the creditor) before proceeding with a petition. 

The concern here is that a winding up petition can have a devastating effect on a company and its supply chain given that once a petition is presented it is open for other creditors to support the petition and where the petition is advertised it is usual for the debtor company bank to freeze its bank accounts.

It is therefore imperative to ensure that any winding up petition is withdrawn before any other creditor supports the petition or it is advertised by the petitioning creditor.  Where this happens to a critical supplier it may be necessary to intervene and support to avoid the potential impacts.

It is clear that increased vigilance will be needed from 1 October 2021 to identify any creditor pressure or insolvency risk for a supplier. It is important to identify the early warning signs of distress and to maintain an open dialogue with suppliers so that there is time to implement a corrective strategy before it starts to impact your business.

Supplier Solidarity 

Over the course of the last 12 months we have supported numerous clients with strategies to support under-performing businesses in the supply chain whether it’s through direct loans; revision of trading terms; advance payments and forward funding; advance ownership or bridging strategies; or partial acquisition or merger with other suppliers to help weather the current head winds.

It appears more important than ever to adopt a collaborative approach to the supply chain as the government support and restrictions fall away with the apparent sink or swim message to business that it needs to keep its head above water and cannot rely upon future government support.