GUEST BLOG: The burden of debt for Irish SMEs

By Niall Ledwidge, senior manager, Duff & Phelps

There is no doubt that distressed Irish SME debt poses a real threat to Ireland’s recovery, future economic growth and employment.

Irish SMEs comprise a significant portion of the nation’s productive economy and employ approximately 800,000 of the country’s 1.2m private sector employees.

Excluding real estate and financial intermediary company debt, there is over €22.6bn of Irish SME debt which relates to the ‘real’ economy and approximately 41% of this is estimated to be in default.

Alarmingly, one in 10 of our larger SMEs which employ between 50 and 249 people have debts that exceed one year’s revenue – the commercial equivalent of a country with a debt to GDP ratio of over 100%.

Given the concerns over the impact of this debt on the economy, it is natural to ask what measures are available to SMEs in addressing their indebtedness.

SOURCES OF FUNDING

At the start of 2014, protocols for dealing with distressed SME debt were agreed by the main Irish banks and AIB and Bank of Ireland claim they have now restructured the majority of their SME loans.

In addition, new sources of SME funding such as the Strategic Banking Corporation of Ireland and the Credit Guarantee Scheme have been established to provide investment and working capital and to refinance facilities held with exiting foreign banks.

However, in circumstances where a suitable restructuring deal is unavailable or insolvency arises as a result of onerous contracts such as upward only property leases, examinership remains the only formal process a company can invoke to avoid a wind up.

NEW REGIME

While examinership has been available to Irish companies since the early ‘90s, the Companies (Miscellaneous Provisions) Act 2013 has introduced a more SME-friendly examinership regime, which can now be accessed through the Circuit Court. Many of the costs of examinership such as working capital funding and creditor dividends will not change as a result of the new legislation, hence it remains to be seen whether the measures introduced will significantly impact the number of SMEs appointing examiners.

With only 14 examinership applications in 2014 and no increase evident in 2015, the volume is still too low to meaningfully address the problem of distressed SME debt.

To be suitable for examinership a company must be able to satisfy the following conditions:

• It must be insolvent
• It must have a reasonable prospect of survival
• It must have sufficient cash flow for the period of examinership
• Its key stakeholders must support a scheme of arrangement
• Sufficient investment must be available to fund a scheme of arrangement

Otherwise the appointment of an examiner will be rejected or the scheme of arrangement will fail. Consequently, examinership suffers from some of the same shortcomings as the new personal insolvency regime in that it is ideal for particular cases, but is not a panacea for the general body of distressed SMEs.

To provide a broader solution policymakers would do well to consider the UK administration regime which is an out of court process and has a much greater take up than examinership in Ireland.

Despite these shortcomings, for suitable companies, examinership can provide a superior outcome to a wind up for almost all stakeholders while putting the business on a sound footing for the future.

A typical outcome for the various stakeholders in a successful examinership can be illustrated as follows:

• The investor will take control of the business
• The secured and preference creditors will receive a better dividend than would be available in a wind up/receivership
• The unsecured creditors will receive a small but larger dividend than they would receive in a wind up
• Most employees will retain their jobs
• The promoter/owner may retain a stake in the business going forward

A PERFECT EXAMPLE

In our experience, examinership can enable ailing but viable companies to successfully restructure their financial affairs and be restored to solvency and profitability.

A good example of what an examiner can deliver in the right circumstances is when Pearse Farrell of Duff & Phelps recently acted as examiner to one of Ireland’s largest dispensing pharmacies and successfully agreed a scheme of arrangement within 56 days – one of the quickest examinerships of its kind in Ireland. The scheme provided all classes of creditor with a greater dividend than would have been available in a wind up, all the employees’ jobs were saved and the business was ideally positioned to trade profitably going forward.

Photo above: TaxRebate.org.uk