Some things change. Some things stay the same. Ten years ago, I asked four of the country’s most prominent insolvency practitioners to a lunch in a city centre restaurant. Ireland was in the teeth of the financial crash, and the four men around the table that day were working through the wreckage – liquidating the firms that could not be saved and restructuring the ones that could.

I was working for The Sunday Business Post at the time, and the idea for the piece was a roundtable discussion about the outlook for the Irish economy, the impact of the crash on specific sectors and the nuts and bolts of the insolvency profession itself.

As it transpired, the restaurant where we dined that day would be bust itself, and its proprietor would spend years battling with a vulture fund over his family home. Meanwhile, one of the four accountants in attendance, Michael McAteer, would later be appointed to The Sunday Business Post as part of the wider restructuring of the Thomas Crosbie Holdings media group. It was just the way of things.

A decade on, Ireland is in the midst of a new crisis, one that has shuttered much of the economy for almost a year. So, I reached out to the four men I dined with in 2011 to see if they would participate in a video call to discuss the impact of the pandemic on business, and to give their outlook on the sectors of the economy most impacted such as property, retail and hospitality.

A decade ago, Michael McAteer was a partner with Grant Thornton and had a slew of high-profile appointments. He was joint administrator to Quinn Insurance and had acted as examiner to both Eircom and Aer Arann. He now leads the firm as managing partner, a role that gives him visibility across a range of industries and issues.

Declan Taite was a partner with FSM Farrell Grant Sparks. He was then a court-appointed receiver over assets of the Quinn family and was receiver to much of the former property empires of Bernard McNamara and Liam Carroll. Farrell Grant Sparks has since been sold to Duff & Phelps, and Taite remains with the firm as managing director.

Kieran Wallace of KPMG was then the share receiver to the Quinn Group, liquidator to Bloxham Stockbrokers and joint receiver to Superquinn. He would later be installed as the special liquidator of IBRC. In this current crisis, he remains equally busy, and is currently the court-appointed examiner to Norwegian Air.

PWC’s Declan McDonald was examiner of Atlantic Homecare and the receiver of a large part of the Treasury Holdings portfolio. In this latest crash, he has been installed as liquidator to a large number of retail chains including Laura Ashley. He was also retained as an independent expert in the examinership battle at confectionary company Broderick’s.

Unlike a decade ago, there was no available restaurant. Instead, the interview took place over Zoom. During the call, we discussed:

• The rise of informal restructurings
• How the crisis will change the labour market
• The future of the office and commercial property
• The government’s response to the crisis
• The impact on the aviation sector
• The outlook for retail and hospitality
• Ireland’s recovery from the last crisis and vulture funds

We began, however, with the impact of the crisis on the economy, and the lack of insolvencies to date:

Ian Kehoe (IK): When we did this before, there were liquidations, examinerships and receiverships on a daily basis. This time, despite the economy being shut down, government supports have kept business alive. But how long can they survive when the economy reopens, and the supports disappear? Will we see more insolvencies?

Declan Taite (DT): I think there will be more insolvencies. Certainly, it won’t happen today or tomorrow. I think when the government and stimulus packages that are there start to get relaxed or reduced, I think you will see insolvencies. There are a number of companies being artificially sustained at the minute. It is not something that will continue on. There will be a correction or an alignment of the economy, but it is not going to happen until quarter three or quarter four this year at best. It will be short and sharp, and it won’t be prolonged. But I think you will see an increase in insolvencies as the year goes on and once the supports and stimuluses are withdrawn.

IK: Kieran, are their sectors that you are particularly concerned about?

Kieran Wallace (KW): I tend to agree with Declan in that it will be short and sharp. I have predicted the timing wrong about three or four times at this stage. We know the sectors that will be impacted; retail, travel, hospitality and companies related to those sectors. Sometimes we forget about the companies that are dependent on those sectors for what they do.

I have a personal view that some of those businesses may well just close, and that they won’t go into a formal insolvency process. But we may well have a significant level of unemployment and maybe a two-tier economy because some sectors will bounce back really well, and some will not. We will have a much more separated economy with two groups – people who are unemployed and will be unemployed for some time to come and other sectors that will be hiring new people at an increased rate. But the marriage of the people who are unemployed and the businesses who are hiring may not actually synch well together. I just wonder will that bring its own challenges over time. We will definitely see an increase in insolvencies. When? I just don’t know. 

Declan McDonald (DMcD): It is that whole transition period and how it will be managed in terms of the government supports falling away and businesses being able to reignite. There is going to be significant working capital requirements for a lot of them, and they may not be able to access it – they may not have the funding required. It will be short and sharp. Kieran is right, there are a lot of smaller businesses that simply won’t open their door again and will just disappear. The flip side of that, depending on what size of business you are talking about, is that there is a lot of funding around in terms of investment. In theory at least, that makes for a pretty positive environment for restructuring.

Michael McAteer (MMcA): I agree somewhat but not entirely with the guys. Certainly, I think it will be a two-tier scenario going forward. Covid brought on what was going to be a change going forward. Where there has been behavioural changes due to consumer habits changing, the companies affected will definitely go into insolvency. I think hospitality will bounce back pretty quickly – restaurants, coffee shops, hotels, cafes – they will all come back with a bang because people will revert to that form of how they spent their money. But when they spend their money differently through online shopping versus physical bricks and mortar, that business is severely challenged. It is not severely challenged because of Covid, but Covid has fast-tracked that fundamental change in behaviour that was going to happen in ten years anyway. There will be a smaller number of insolvencies than you would think considering the crisis that you have gone through.

The rise of informal restructurings

IK: I want to talk about the point Declan McDonald made about restructurings. Is that going to be a trend? You all are talking to companies all the time. Are they gearing up for more informal restructuring?

DT: It is happening now already. People are mindful of cash burn, particularly businesses that are closed. They are still burning cash even though they are closed and not generating revenue to the extent that they had. In terms of cost cutting and restructuring measures, a lot of that is happening. There is ongoing engagement with funders, with finance providers and so on. I think there will be a continuum of that as we start to exit the pandemic and the roll-out of the vaccine continues and we get some semblance of normality back into the economy. But I think there will be a lot of informal restructurings aside from formal examinerships. Obviously, we have the new insolvency regime coming down the tracks in terms of the rescue for smaller companies and that will get some momentum later in the year. But yes there will be a lot of informal restructuring.

KW: Everybody for a long time has said that examinership is going to be a really popular process and that we are going to see loads of examinerships. But we haven’t. I am not convinced we will because for certain sizes of companies they see it as too expensive and too cumbersome a process for what it is they actually want to achieve. And they are scared about going to court, particularly small businesses, and having their destiny in someone else’s hands. I agree that there will many informal restructurings, helping companies reshape where they are going.

Taking Mick’s point on the hospitality – hotels may find it hard getting labour into the country to open up because a lot of them have been dependent on foreign labour. It will be interesting to see how people do open up, how they fund that opening up, how they manage their cashflow. They could well run out of cash at some point, and they will need a restructure to manage the issues. I am seeing it with clients at the moment – people are willing to do consensual deals and take payments over a period of time and find a solution without a formal insolvency process.

MMcA: It is an interesting point about the job market and the differences coming. We have all been so used to an open economy, where if you went to a bar or a restaurant, you were more likely to get served by someone from a different country than from Ireland. But there will be significant unemployment, and it may end up changing the makeup of employment. We may end up having Irish people working in Irish bars, restaurants and so on, especially outside Dublin. A lot of people have gone home, and they may choose to take jobs there because they are happy back home, especially if they had a retail job in Dublin which is probably gone.

Property and the future of the office

IK: On that point. Residential rents came down in Dublin, but they have gone up around the country, particularly other cities. One of the trends that we have seen over the last few years has been a twin-track economy where Dublin was driving ahead and the rest of the country was not. Do you think Covid could change that dynamic?

DMcD: It is probably starting already. It is ironic that it has taken a pandemic to get a special strategy that works. I think a lot of people have taken a deep breath during this whole period and reconsidered their lifestyle, the way they are living, where they are living, and how much income they really need. Can they live in a different environment? I think that is great. We have seen house price on the western seaboard spike. We are all sitting at home. People are on websites viewing houses virtually and realising what they can get for the money – with a very different lifestyle and very different childcare.

There is also a part of me that thinks that, generationally, memories are short. As human beings, we tend to gravitate to what we are used to doing. It is the same around the whole remote working piece – there is a common consensus that we will move towards something different but how different it is going to be remains unclear. Will there be a long-term substantial shift? I am not sure.

KW: I totally agree. I look at our own team. It is the younger people in the team who want to get back into the office. They can’t wait to come back.

DT: I think when the pandemic started nearly 12 months ago there was concern and apprehension that people would struggle to work from home. The model is now proven. It is doable. There are certain aspects of the economy where people physically need to be there to do their work. We are all dialling in remotely. We can do a lot of our work remotely and we physically don’t need to be in the office.

In terms of the staff dynamic and staff wellbeing, the office is important. But I am not sure we will all be back in the office on a full-time five-day week. There is new legislation coming in later this year in terms of people’s ability to work from home, so that will change the dynamic as well. But I am not sure we will ever get fully back to what it was like before March 2020.

MMcA: We surveyed our staff. We do it every eight weeks. We do it anonymously. But we do capture what unit they work in and what location they are in and what age profile they are in. 22 per cent of our staff never want to walk back into an office ever. Only ten per cent want to come in five days. And the balance want to work a hybrid. Interestingly, the majority of the 22 per cent who do not want to come back are aged between 21 and 30. I was stunned. We did it in January. It was dark and miserable and high Covid numbers. I think part of the issue is they have all gone home. They are not living in Dublin anymore.

IK: What does that mean for the future of property?

KW: We are looking for a building at the moment. It does not matter to us whether you have people doing three days week in the office or four days. You still need roughly the same space to accommodate them on the days they are in.

IK: So, you are not pessimistic on commercial property?

MMcA: I think the office is going to be key to the future. But it just won’t be the centre going forward. Our age profile on this call here is fundamentally different to the 22- or 23-year-olds, and they just see things differently. The genie is out of the bottle. We are never going back.

DMcD: The nine to five and weekends off has been around since the industrial revolution. There has been lots of talk about getting away from it. and it has taken this kind of a shock for it to actually change. The idea of the entire office working population getting into a car, a train or a bus in the same two-hour window every morning and evening to get from A to B – if you stand back and think about it, it is insane. Personally, for me, one of the things I will never do again if I can avoid it is travel during rush hour, such a waste of time. It is all about flexibility.

DT: I agree with the lads particularly around the issue of different preferences dependent on your age profile. As employers, offering that flexibility is crucial for both staff retention and staff recruitment.

*****

New faces in an old profession

Over the past decade, a number of new professionals have emerged in the insolvency space, including Myles Kirby, a partner with Kirby Healy Chartered Accountants. Healy has specialised in forensic accountancy, and has worked on a number of complex liquidations such as Ammado, the charity platform led by Peter Conlon. I asked Kirby to outline the differences between this crisis and the last, as well as changes he had experienced in the insolvency business.

“The two crises are in marked contrast. The last recession was a feature of unsustainable property debt. This was masked by ever rising property prices which came to a crashing halt exposing unsustainable, debt-ridden companies. There was a belated rush by banks to protect their positions and take control of assets often via receivership. This was exacerbated by overseas banks withdrawing from the Irish market. The economic impact was wider but the big insolvencies were in sectors that were exposed to property.

“This crisis is completely different. Instead of threats to unsustainable property companies, this time around we have threats to otherwise perfectly viable companies. A year into the crisis and the one consistent (and welcome) thing I’m hearing is that the level of new insolvencies is far below what we all expected. This is surprising but it highlights the contrast. The consequences and cost of widespread closures and mass redundancies from Covid are enormous and it is in the wider interest to avoid insolvencies. In addition to government supports, the biggest creditors such as Revenue and the banks have shown forbearance.

“Interestingly, I think landlords as creditors are facing a real dilemma. Taking aggressive legal action against tenants may achieve little more than an empty property with few occupiers queuing up. That must be weighed up against supporting existing tenants in the hope that normal service will in time resume. To put it bluntly, in the property crisis, creditors put their debtors into insolvency to protect their positions. This time creditors want to keep their debtors out of insolvency to protect their positions. 

“All this may change as businesses reopen and suppliers and creditors are pressing for payment. How that all plays out remains to be seen but there will be a lot of legal threats, brinksmanship and heated discussions in the coming months.

“One inevitable consequence of more insolvencies was more litigation and there has been an explosion of High Court and Court of Appeal cases. This body of law has evolved very quickly over a relatively short time. One notable feature of this is the proliferation of lay litigants and unqualified “advisors” in recent years. For some litigants, this is a feature of their unfortunate financial circumstances.  For others it is born out of desperation.  Certainly before the Court closures, every week the Chancery list featured cases of lay litigants defending receiver injunctions. 

“Personally I have noticed a big increase in overseas investigations and litigation. That is partially attributable to the ease with which money can be moved around the globe with internet banking and international trade. It is also a feature of the lengths to which a small minority of debtors will go to put assets beyond the reach of their creditors. Previously exotic legal remedies like Mareva injunctions and Norwich Pharmacal Orders are becoming more common. The courts are more than willing to come to the aid of creditors who have been defrauded and I see this as a growing area in the profession.”

The state’s Covid response

IK: What is your take on the government’s response to the crisis?

KW: I think the response, and what they have done to date, will become less relevant. What they will be judged on – and the only thing they will be judged on in hindsight – is the vaccination programme and how they manage it.

DMcD: In terms of has the government’s intervention from a financial point of view worked, the answer is probably yes. The insolvencies numbers are low. You can see from this discussion we have mixed views of what insolvency numbers might get to and when that will be. An enormous amount of money has been pumped into the system. That said there is certainly a two-tier economy emerging. it has hit younger people and the sectors we spoke about harder than others. But in the main, the interventions are working.

KW: But someone is going to have to pay for it.

MMcA: I think we would have had civil unrest if those interventions had not occurred over the past nine months. The government has done as good a job as it could to keep a sticking plaster on it. But you are 100 per cent right – the sticking plaster only works if you can get out the far side and that gets back to the vaccination programme and when the economy reopens, that is going to be the key.

DT: I think the government response has been fair and balanced particularly when you consider the speed at which they had to move and react. Covid came upon us relatively quickly. Obviously, there were outbreaks in late 2019 in China. But when it kicked off in March 2020, they moved quickly and decisively. The packages they have brought in have been broadly fair and equitable. You are never going to please everybody. Certain sectors probably got better supports and stimuluses than others. A lot of the criticism they received was about opening the economy before Christmas and the daily cases jumping from 200 a day to 9,000. But it ultimately comes down to the roll-out of the vaccination – how quickly they can do that and when the economy can start to reopen. That is what they will be judged on.

KW: You can see the positivity at the moment in the UK. This is happening because of the UK’s ability to get the vaccination programme up and running so quickly and so effectively.

Grounded: the future of aviation

IK: In terms of sectors, one of the areas that has taken a battering is aviation. Kieran, you steered CityJet through an examinership. You liquidated USIT and you are the examiner to Norwegian at the moment. Do you think that sector can ever fully recover?

KW: Absolutely. I cannot wait to get in a plane and to go somewhere. I was talking to someone this morning and I said how I could cheer myself up. They said, book a flight, even if it is the end of the year and even if you go nowhere in the end. You will have something to look forward to. I actually did. I booked a flight for the end of the year. I might never actually get on it. I cannot wait to travel again. The last time I was on a plane was a year ago. I used to travel two or three times a month. I may not do the same amount of travel. My balance and preferences may be different. Covid has reminded me of the importance for personal travel and taking the opportunity to travel to different places around the world and see them.

IK: Yes, but there will have to be a restructuring of the sector?

KW: You forget, we are in our own bubble here. We are dealing with stuff in different jurisdictions at the moment and there are lots of people still travelling. There are airlines with decent load factors in different parts of the world. If you look at Europe, it is a different ball game. I do feel for the airline sector here. It must be incredibly tough for them in the environment they are in but I do think it is a sector that will bounce back.

DMcD: I think it will and in terms of the aircraft leasing industry, clearly the larger players have access to funding and the capital markets. They have raised significant amounts of funding during the pandemic. Then there is another cohort that are hanging on. I think there is probably likely to be more consolidation and M&A type activity rather than outright distress. As a country, I don’t think long term we have that much to worry about in that area.

DT: It comes back to consumer sentiment and consumer demand. There is pent up demand out there. People have not had business travel or foreign holidays. It will happen at some stage. Once the vaccination programmes are rolled out across the jurisdictions and that pent up demand is released, you are going to have full load capacity. That will drive the recovery. There will be a little bit more pain to take for some of the airlines and some of the aircraft leasing companies but I think it will bounce back. 

Shuttered: retail and hospitality

IK: I interviewed the Governor of the Central bank a number of weeks ago and he drew the distinction between retail and hospitality. He felt hospitality would recover but he was really downbeat on retail. And it is a sector that impacts on both retail property and also on lower paid workers who will struggle to find employment.

MMcA: Retail has changed, and consumers habits have changed. You can’t take a blanket approach on all retail. Sometimes you need to touch and feel the product you are going to buy. But the ease of buying online. I would rush back to shopping in bricks and mortar retail. My own teenage boy buys constantly online. I think they will still go into town for the experience. But it is hard to see department stores coming back.

IK: And if you look at research shopping centres are struggling in terms of values.

DMcD: You saw on Grafton Street some deals being done at a 25 per cent discount. It is clearly going to have an impact. A fundamental change was already happening in retail. But it was happening slowly, and the pandemic has accelerated it beyond belief. Consumers are reacting to that so businesses are going to have to react to it.

Consumer behaviours is changing. The younger, social media savvy generation, want to shop from retailers that have a sustainable agenda, there is a lot of activism around fashion. The whole thing has been turned on its head in the space of ten months, rather than ten years. And that is clearly going to have an impact on property values.

DT: The migration to ecommerce platforms had started but Covid has been an accelerant. Demand will still be there but how consumers source and purchase goods has fundamentally changed. Retail property demand will be affected.

KW: I agree with the guys, but you have to worry as it is a risk about the future of pubs in city centres, restaurants in city centres and the whole fabric of a city centre. 

IK: And if you can live anywhere, foreign companies can operate anywhere too.

MMcA: We went into Covid with about 11 per cent of our staff from the Philippines. We were immediately put under pressure to allow them to work in the Philippines, to be closer to home. Under the current tax system, it is too hard. If you have somebody working in the Philippines for Irish clients, you have GDPR issues – where is the data maintained? If they are paid a salary in the Philippines, do you have to run a shadow payroll? If you get sick, under what system are you covered? If they are accredited accountants and you want that work recognised, they have to spend physically 183 days in the country to be recognised. It is very complicated.

IK: On the retail piece, we have seen a surge of litigation between landlords and tenants – everyone from Eason to Tommy Hilfiger are being sued. Some 75 per cent of retail rents have not been paid in recent months. Do we need a burden sharing or how do we deal with it?

DMcD: An awful lot of businesses went into this pandemic with relatively healthy balance sheets. They reacted to the lockdown by pulling in the horns and cutting their costs. Part of that was not paying any rent, and looking for rent holidays. In the first lockdown, there was an element that we were all in this together and everyone was pulling together. There was no major pressure in the system from creditors. That sentiment is running out the longer lock down goes on, consequently, you are seeing some of that pressure coming on now. Ultimately, there is a wave of rent arrears – and substantial Revenue liabilities warehoused. But there is a lot that will have to be dealt with. Whether it is going to be dealt with though formal or informal restructurings, that remains to be seen. But all of it will have to come out in the wash.

IK: There is a generational issue here. Youth unemployment is staggeringly high. They are missing out on career progression. You have talked about a twin-track economy, but this is another brewing issue.

MMcA: It is about skills, about making sure they have the right skills to be able to exploit where the opportunities are in the marketplace. 

DT: I think it will be twin-track. The cohort of the economy that have been most affected by Covid are probably going to be more cautious than those who have been less impacted by it.

MMcA: There is a big difference between now and 2008 when that part of the economy did not have any money and had no confidence. That is why it is different.

DMcD: When you talk about consumer confidence, it is not the traditional consumer confidence. It is the confidence of people congregating in large numbers in enclosed spaces to spend their money. A cohort of people will be cautious about going to a packed venue.

The boxer who became a liquidator

Accountant Aidan Garcia Diaz began his career as a professional boxer before retraining to work in insolvency and tax in 2007. He is the owner of Sabios, a boutique tax and insolvency company, based in Ballsbridge, Dublin 4. He has worked on 300 insolvency assignments and been appointed either liquidator, examiner or receiver to some 200 companies. High-profile cases include the liquidation of Brendan Investments, a property company once backed by Eddie Hobbs, and the Ely Property Group led by businessman Philip Marley.

Most of the companies he liquidates are more low-profile and a specialty is family company liquidations. “Our work never strays outside of insolvency and tax advisory. Our core work streams come from insolvency or restructuring businesses, or structuring them in the first place, and providing tax advice to entities looking to minimise their tax bill or dealing with tax difficulties,” he said.

The company also works in Spain and the Nordic region, and he said the Irish Revenue Commissioners support for Irish businesses “compares very favourably to many tax authorities elsewhere in Europe.” He thinks the hospitality sector and commercial property sector are facing major challenges.

“The hospitality sector has been decimated and it is a fact that many of the businesses that have closed will not reopen,” he said. “The prospect of re-opening and being faced with earning much less for years only to have to pay back rent arrears, mortgages, etc. is daunting and, as a result, I think we will see a lot of examinership applications to get rid of the debt overhang. Some of this will be passed on to landlords who will have difficult conversations with their own bankers.” Garcia Diaz said landlords have received mortgage breaks from banks while tenants are forced to close, but this doesn’t make the issue disappear.

“If tenants then liquidate or head down the examinership route, this is unlikely to go down well with the banks and, in the short term, I fear we will see a spike in receiverships,” he said. The trend of home working, he said, would further depress demand and put more pressure on landlords. He added government supports for business were welcome but will inevitably have to end eventually. “Zombie businesses, which would have closed without such support, will collapse into insolvency,” he said. “This will be unavoidable and there will be a deluge.”

“Where the government needs to step in is in relation to SME debt, given much is backed by business owner personal guarantees. Almost all of the impending insolvencies will be genuine and caused by what is in effect a natural disaster. The whole personal guarantee enforcement space will need to be looked at. It remains to be seen whether the government has either the will or strength to do this.”

Reopening, he said, would increase consumer spending but not enough to cancel out the debt overhang of being closed for long periods. “Businesses will need to move early to restructure their debt to allow the future to be their own. I see 36 months of turmoil before, as everything does in life, a natural level is found.”

Contrasts with the last crash

IK: The last time we did this, Ireland was in the teeth of a recession. Looking back now, what strikes you from that period and Ireland’s recovery?

DT: In terms of where we were when we sat down ten years ago and where we are now, it is fundamentally different. The speed at which the banks, were able to deleverage and were able to do significant loan sales – Nama loan sales, AIB and UB loan sales, Kieran’s involvement in IBRC, and he had loan sales there – and the acquisition of those portfolios by international private equity happened quicker than anyone envisaged back in 2009 and 2010. That was the trigger, that was the catalyst. It brought new money into the economy. It brought international private equity money in that had not been there. It was worked through quicker than I personally envisaged.

KW: : I remember when I started as a trainee in restructuring with what was then Stokes Kennedy Crowley in 1991, Ray (Jackson) said to me that if I was going to spend a career in insolvency, get used to peaks and troughs because that is what our business is about. That is what has happened time and again. We got back a lot quicker than most people thought. In fairness to the governments over the time, I think they managed the economy very well. that really helped get us back to where we got to quickly.

MMcA: There were three different governments over the period, and I think they all followed the same principles. There was a consistency of approach.  We approached the recession a lot more like how the Americans approach a recession. You have a problem – you get to the bottom of the market quickly and then you deal with it immediately. You acknowledge ground zero as quickly as possible and then you rebuild again. A more European approach was to extend, pretend and manage and you never get to the bottom as quickly.

DMcD: Am I surprised at how quickly things rebounded in the last decade? Probably not. For a lot of the reasons that Declan outlined. A lot of international money flowed into the country and was in a lot of respects very new to the market. We all had to get our heads around it and get used to it. That was something we had not seen before and that capital was something we needed – despite criticisms of some of the credit funds that set up here. If we did not have access to capital, we would not have rebounded as well as we did.