With businesses looking to rebound strongly, turnaround investment is on the up, according to GE Capital.

With businesses looking to rebound strongly, turnaround investment is on the up, according to GE Capital.

Turnaround activity moves with the peaks and troughs of the market, with downturns often presenting exciting opportunities for restructuring financiers.

Turnaround investors are now looking at acquiring struggling businesses at an earlier stage than previously, according to Adam Johnson, managing director of corporate structured finance at GE Capital. ‘Typically, with companies that have entered an insolvency process you have greater value destruction,’ he explains. The sooner the turnaround process begins, the more value can be retained.

Johnson adds that GE Capital has seen increasing amounts of turnaround activity in the marketplace during the past six to nine months, albeit not to the extent one would expect at this stage in the economic cycle.

John Nelson, commercial leader – Lending at GE Capital, says it’s a case of private equity seeing more value. He explains that it’s often a simple situation of businesses having a functioning operational model but a broken financial one. He adds: ‘We are seeing opportunities – someone going in with equity, putting the business back on a stable footing and then providing some working capital for the company.’

Nelson sees this kind of transaction occurring in increasing numbers as HMRC toughens up its stance on overdue tax and banks tighten their belts.

For Johnson, the tipping point is the access to capital and financing componentry within the existing capital structure. ‘Also the business strategy, direction of the company and current market dynamics are other important aspects that are affecting struggling businesses right now,’ he adds.

SHORTFALL

Commenting on the fact that GE Capital’s level of involvement in the turnaround sector this year has been short of the level expected, Johnson explains: ‘So far this year, only 15 per cent has been turnaround related; the rest of the activity has been M&A transaction related or refinancings.’

In examining troubled sectors, Nelson identifies the retail area as having an underlying lack of consumer confidence. He adds that the manufacturing sector, where GE Capital is heavily involved, is a different matter. He says: ‘They are seeing demand and a pick-up in orders.

Instead, for them, the issue is the availability of financing as they come out of the downturn.

‘We are seeing banks unable to offer loans and overdrafts in the way they did pre-credit crunch, and therefore alternative financing is increasingly seen as a way forward.’

With the possible rise in interest rates breathing down the necks of many business owners across the country, Nelson believes that the first upshot of any rise would be reflected in a fall in consumer spending.

He adds that a fairly moderate increase in overdraft rates will put a lot of people under pressure, which will then filter down through the retail sector and to the suppliers: ‘They are going to have a tough six to 12 months.’

Looking forward, Johnson sees the biggest growth opportunities coming from those sectors that first felt the pinch following the crash. ‘The industries that typically experienced high volatility and a trading downturn immediately following the credit crunch are the ones that have tended to recover first,’ Johnson explains.

‘The automotive market is a good example of this, where the residual values of vehicles have recovered most in that particular industry.’

Adam Johnson
MD of Corporate Structured finance
GE Capital
Mob: 07920 723923
Email: adamlr.johnson@ge.com

John Nelson
Commercial Leader – Lending
GE Capital
Mob: 07801 471604
Email: john.nelson@ge.com