The results of Grant Thornton's 'Restructuring Outlook for 2012' survey provide insights into the factors that lead to corporate underperformance, the restructuring strategies that are commonly employed and how these strategies are likely to evolve in 2012. The briefing also provides an overview of the sectors considered particularly vulnerable in the current climate.

1. Restructuring Outlook for 2012
March 2012

2. Key themes for 2012
The restructuring landscape in 2012 is likely to
be characterised by low interest rates, a lack of
liquidity and low asset prices as well as banks’
continuing efforts to minimise losses.
In line with this, respondents to Grant Thornton’s
‘Restructuring Outlook for 2012’ survey expect that
underperforming businesses in the UK, their funders
and other stakeholders will continue to collaborate,
wherever possible, to save businesses through
financial and operational restructurings.
However, respondents also highlighted that
some business models will need a radical overhaul
to survive in a low growth economy and that a
restriction in credit availability, which many expect
to worsen in 2012, may make this particularly
Contents
difficult. Also of concern to respondents is
‘restructuring fatigue’ of management teams and 2. Key themes for 2012
stakeholders, especially in relation to companies that
have been through numerous restructurings already. 3. Summary of survey findings
Predictably, a large number of respondents
4. Macro-economic threats and the outlook
caveated their responses in case of a disorderly
for the UK economy
Greek default or a breakup of the Eurozone. One
respondent said memorably: 6. Resilience of UK business in 2012
8. Restructuring strategies employed
“If the Euro collapses then all bets 12. Refinancings, forbearance and
are off” administration levels
Restructuring/recovery banker
15. About ‘Restructuring Outlook for 2012’
2 The Restructuring Outlook for 2012

3. Summary of survey findings
Perhaps unsurprisingly, 72% of respondents think that the Eurozone
sovereign debt crisis poses the greatest macro-economic threat to the
UK economy in 2012, followed by stagnating UK growth and the
Government’s austerity measures.
The UK economy Trading administrations/pre-packs
63% of respondents expect a deterioration of In line with the subdued outlook for the UK
economic conditions in 2012. More positively, economy, 51% of respondents expect trading
only 7% expect a significant deterioration. administrations to increase in 2012. This is, of
course, from a relatively low level. The same
Defaults and sectors most at risk percentage of respondents expect pre-pack
75% of respondents expect default rates to go up administrations to increase.
in 2012, with retail, hotels/leisure, print, property/
construction, haulage/logistics and travel/tourism
rated as particularly vulnerable.
Factors leading to distress
When asked to rate the contributory factors for
distress in 2011, the vast majority of respondents “There is now a greater realisation by funders that
highlighted declining revenues and rising costs. ‘extend and pretend’ strategies which are reliant on
These issues were commonly compounded by poor
low interest rates and low inflation come with a ‘sell-
management decisions and poor financial control.
by-date’ and that fixes to the capital structure, and
in many cases, far reaching operational changes are
Restructuring solutions
When asked which restructuring strategies
necessary to create sustainable value.”
Mark Byers, Partner, Global Head of Restructuring
were successfully implemented in 2011, most
highlighted better cash flow management,
cost cutting programmes and staff reductions.
Respondents said that whilst cash control will
still be key in 2012, the focus will shift towards
operational restructurings.
Availability of refinancing funds
The majority, 60%, of respondents expect the
availability of funds for refinancing in 2012 to be
broadly the same as in the previous year. Of note
is that 56% of respondents expect an increase in
the availability of distressed asset funds whilst just
under 50% expect a decrease in leveraged finance.
The Restructuring Outlook for 2012 3

4. Macro-economic threats
and the outlook for the
UK economy
Macro-economic threats to the UK economy
Perhaps unsurprisingly, 72% of respondents think
that the Eurozone sovereign debt crisis poses
the greatest macro-economic threat to the UK
economy in 2012, followed by stagnating UK
growth and the Government’s austerity measures.
Fig 1: Looking to the next 12 months, how do you rate the impact
of the following macro trends?
% of respondents rating impact as highest (8 to 10 out of range 1 to 10)
80
72%
70
59%
60
49%
50 45%
“Addressing the uncertainty in the Eurozone has to form
40 36% a fundamental part of any longer term solution within
30 the UK economy”
20 15% 15% Restructuring/recovery banker
10
0
The weighting given to the Eurozone sovereign
Prolonged stagnant/slow growth in the UK
UK Corporate tax burden
UK austerity measures
Eurozone sovereign debt crisis
More limited debt finance
UK double-dip
Currency issues
debt crisis undoubtedly reflects the importance
of the Eurozone export market to UK businesses,
but it is also a measure of the growing sense that
Europe’s politicians are failing to control the crisis.
A number of respondents voiced grave concerns
over the Eurozone sovereign debt crisis and
predict, if it is not contained, a crisis of confidence
across Europe and globally with much greater
ramifications than the contraction of credit
following the collapse of Lehman Brothers. A
similar number, however, were more bullish about
the Euro and expect the currency to survive.
4 The Restructuring Outlook for 2012

5. “I’ve been predicting more corporate failures for the
last two years and it’s not happened. So although
everyone is saying 2012 will be even harder I’m actually
expecting a similar year to the last two”
Restructuring/recovery banker
Outlook for the UK economy in 2012
“I expect economic conditions to be challenging In line with UK economic projections, 63% of
in 2012. This combined with lenders seeking to respondents expect a deterioration of economic
conditions in 2012. More positively, only 7% expect
deleverage their own balance sheets and having limited
a significant deterioration. 28% expect economic
appetite for new money will mean many restructurings conditions to stay the same, whilst 2% expect them
will be structured to deliver a short term exit” to improve somewhat. No one surveyed expects the
Restructuring/recovery banker economy to improve significantly.
UK’s negative GDP growth in Quarter 4 2011
adds weight to respondents’ pessimistic outlook
for 2012. However, respondents point to the low
interest rate environment in the UK as a key life
line for underperforming businesses in 2012. Also,
some expect the Olympics to provide a much
needed boost to the London economy and, in
particular, to the leisure and retail sectors.
Fig 2: Looking to the next 12 months, do you expect UK economic
conditions to
2%
7%
28%
63%
Deteriorate significantly Deteriorate somewhat
Stay the same Improve somewhat
Improve significantly* (nobody chose this option)
The Restructuring Outlook for 2012 5

6. Resilience of UK business
in 2012
Default levels
The vast majority of respondents, 75%, expect default levels to increase in 2012, as
conditions for many UK businesses deteriorate, with public sector cuts continuing to
filter through and private sector growth remaining sluggish.
Fig 3: Looking at the next 12 months, how do you expect default levels to develop?
1%
24%
Increase
Stay the same
Decline
75% “As defaults increase opportunities
will undoubtedly arise for
distressed investors, however I
would also point out that many
UK companies are now looking
to transactions as a route to
performance improvements. But
in a climate of much more limited
finance, companies will need
to closely interrogate valuation
fundamentals and the promise of
synergies to return meaningful
benefits to shareholders”
Geoff Davies, Partner, Head of Corporate Finance
6 The Restructuring Outlook for 2012

7. Fig 4: Looking at the next 12 months, how would you rate the resilience of the following sectors of
the UK economy?
Higher resiliance Average resiliance Lower resiliance
Retail
Hotels/ Pubs/
Leisure
Printing
Property/
Construction
Haulage/ Logistics
Travel/ Tourism
Automotive
Financial Services
Healthcare (private)
Professional Practices
Manufacturing
Infrastructure
Agribusiness/ Food/
Beverage
Aerospace/ Defence
Technology/ Media
/ Telecoms
Pharma/ Biotech/
Medical Devices
Energy/ Utility
0 20 40 60 80 100
Sectors most at risk in 2012 Generally speaking, UK companies
Unsurprisingly, sectors vulnerable to in global markets can look to harness
low consumer confidence and lower new export markets, source lower cost
credit availability, are considered to production and look to outsourcing
have the lowest resilience in 2012. More to mitigate against the risks of a UK
than 90% of respondents expect Retail and European downturn, whilst those
and Hotels/Leisure and Pubs to be reliant on the domestic and European
particularly vulnerable. Print, Property/ market will continue to find trading
Construction, Haulage/Logistics and conditions difficult in 2012.
Travel/Tourism and are the next most
vulnerable sectors. Marginally more
respondents expect the Automotive
sector to have lower than average
resilience, so this is another sector to
watch in 2012.
Respondents rated only two sectors,
Energy/Utility (71% of respondents)
and Pharma/Biotech/Medical devices
(53% of respondents) as more resilient
than the average.
The Restructuring Outlook for 2012 7

8. Restructuring strategies
employed
Contributory factors leading to
underperformance of UK businesses
When asked to rate the contributory factors for
distress in 2011, the vast majority of respondents
highlighted declining revenues and rising costs.
These issues were commonly compounded by poor
management decisions and poor financial control.
Fig 5: Looking at the distressed cases you worked on in the last 12 months, what were the main contributory factors leading to distress?
100
80
60
40
20
0
Decline in revenues
Poor management decisions
Poor financial control
Rising costs
Inappropriate business model
More limited/ expensive
debt finance
Tax/TTP debt burden
Increased competition
Public sector cuts
Fraud
Product substitution/
obsolesence
Export market volatility
External Regulation
8 The Restructuring Outlook for 2012

9. Financial and operational
Fig 6: In the last 12 months, what type of restructuring strategies have been employed in the cases you
restructurings favoured in 2011 worked on?
Respondents reported that the majority
All of them The majority The minority None
of distressed businesses they worked
with in 2011 carried out financial Financial restructuring
and operational restructures. Whilst Operational restructuring /Turnaround
operational restructurings have taken
Administration
place in many cases, these were mostly
Pre-pack administration
around cost cutting and staff reductions.
Banks agreed to rollover debt with CVA
changes to terms in the majority of Exit via alternative funder
cases. Administrations and pre-pack Rollover with changes to terms
administrations were seen as the last Forebearance
resort and were employed as such. CVAs
0 20 40 60 80 100
and exits via alternative lenders were
employed in a minority of cases.
“With downside risks for the global
economy depressing company
valuations, banks will continue to
favour consensual restructuring
“Lack of liquidity in the market will dissuade lenders solutions over forced disposals or
from exiting by administration where avoidable.” insolvency. However, a significant
Restructuring/recovery banker number of underperforming
businesses have gone through a
number of restructurings already.
For these businesses the questions
must surely be: Is the underlying
business still viable? If so, how can
restructuring fatigue be avoided?”
David Dunckley, Partner, Head of Mid Market Restructuring
The Restructuring Outlook for 2012 9

10. Restructuring strategies to deal
Fig 7: Looking back at the last 12 months, did your borrowers successfully implement the following?
with underperformance
All of them The majority The minority None
When asked which restructuring
strategies were successfully Better cash flow management
implemented in 2011, most highlight
Cost cutting programmes
better cash flow management,
Reduction in staff cost
cost cutting programmes and staff
Realignment of strategy/ business model
reductions. Respondents said that
whilst cash control will still be key in Better focus on sales and marketing
2012, the attention is shifting towards a Management team restructure
more focused assessment of operational Divestments of non-core assets
deficiencies, their impact on the Diversification strategy
bottom line and the capital expenditure
Outsourcing strategy
necessary to deal with them.
0 20 40 60 80 100 120
Interestingly, whilst 80%
of respondents point to poor
management decisions as a key
contributory factor leading to
distress in 2011, management team
restructures were only implemented
in the minority of cases. Working
with management teams of distressed
“Over the last few years, especially
companies to drive behavioural and
more structural changes will need to for businesses that were not in
be a key area of focus for 2012. actual payment default, the lenders’
restructuring approach was often to
‘extend and pretend’ and fixes to the
“More operational restructuring required as capital structure were often avoided.
follow up to earlier financial restructurings that Many of these companies will need to
haven’t worked. More pain to be taken as poor substantially increase their trading activity
businesses face up to years of excess that they to avoid future covenant breaches. In a
can no longer carry.” stagnating economy, this may well require
Restructuring/recovery banker a fundamental rethink of their business
model to drive profitability and growth”
Stephen Rigby, Partner, Head of Performance Improvement
10 The Restructuring Outlook for 2012

11. Sectors under threat
Retail
“Over the last few years many retailers have
failed to adapt their business model to the
changes in the way that consumers shop.
Hotels
Where operational restructuring did occur, it “In 2012 hotel performance will
was mostly reactive and focused on aligning follow a similar trend to that
the cost base to perceived recessionary in 2011, with London hotels
trading levels, in the expectation that the outperforming regional hotels
market would soon return to 2007 levels. For and with budget, limited service
many retailers, this may prove a fatal error and luxury hotels outperforming
as the current and future retail environment the 4-star sector. The 4-star
requires a significantly reduced physical hotel business model will remain
footprint. So, the right-sizing of retailer’s under significant pressure, with
store footprint will need to be a key area of limited service hotels successfully
focus in 2012, alongside continuous efforts to targeting corporate business. This
optimise their supply chain, merchandising will be compounded by the fact
and retail operations.” that many hotels in this segment
Grant McRobert, Restructuring Partner, Retail have been under invested for some
time. As a result the 4-star sector
is a key area to watch in 2012 as
are hotel operators with significant
debt servicing commitments.”
Adrian Richards, Restructuring Partner, Hotels
Real Estate
“The last six months have seen a contraction
in bank funding to the real estate sector as
well as a decline in the number of potential
purchasers. With fewer exit options available
in distressed property situations, lenders are
looking to increase, rather than just realise,
the value of their security. Lenders are
therefore increasingly aligning the interests of
their advisors, seeking to reward on the basis
of the uplift in value achieved upon exit.”
Jeremy Toone, Partner, Real Estate Advisory
The Restructuring Outlook for 2012 11

12. Refinancings, forbearance and
administration levels
Availability of funds to refinance existing bank debt
The majority, 60%, of respondents expect the availability of funds for
refinancing in 2012 to be broadly the same as in the previous year. Of
note is that 56% of respondents expect an increase in the availability
of distressed asset funds whilst just under 50% expect a decrease in
leveraged finance.
The expected restriction of leveraged finance availability in the
market will be of significant concern, as will be the impact of the ‘wall of
refinancing’ on debt markets in 2012 and beyond. At present, it is unclear
how the estimated £150bn – £200bn of sub-investment grade refinancings,
which will become due over the next few years, will impact on the market.
Underperforming companies and those in sectors that are considered less
resilient will be most vulnerable to a possible credit restriction in 2012.
Fig 8: In terms of restructuring/refinancing existing bank debt, how much would you rate the
availability of the following in 2012?
Less availability than in 2011 Same as 2011 More availability than in 2011
Leveraged finance
Bi-lateral lending
“Those looking to refinance
Club deals/syndicated in 2012, whether by choice or
necessity, are facing a changed
Shareholders environment. Leveraged finance
is not as readily available and
PE finance for some, alternative sources of
finance, such as asset based lending
Debt for equity swaps with its lower capital adequacy
requirement, may well become the
ABL funding solution of choice”
David Riley, Partner, Advisory
Distressed asset funds
0 20 40 60 80 100
12 The Restructuring Outlook for 2012

13. “During the course of 2012 banks
are likely to be more mindful
of forbearance levels especially
if more severe macro-economic
scenarios develop. The impact of
lender forbearance and to which
Use of forbearance in 2012 degree forbearance has masked an
The majority of respondents, 57%, expect the use of forbearance to underlying risk to banks’ capital
remain at the same level as in 2011. A sizable number of respondents, levels will only become clearer
29%, expect banks to make more use of forbearance, whilst 15%
if these macro-economic threats
expect a decline.
play out.”
Fig 9: In 2012, do you expect bank forbearance Mark Byers, Partner, Global Head of Restructuring
strategies to be used
More than in 2011 Same level as 2011 “A large part of forbearance risk
Less than in 2011 in the UK will be attached to
residential and commercial real
estate, saying this, as the use of
15%
forbearance comes under greater
29% scrutiny by the FSA and other
regulators, it will become critical
for corporate restructuring
strategies to deliver more than
‘just time’.”
Daniel Smith, Partner, Restructuring
57%
The Restructuring Outlook for 2012 13

14. Levels of pre-pack and trading
administrations
The lack of liquidity in the market
will continue to make trading
administrations the least attractive
option for exit. However, in line
with the subdued outlook for the
UK economy, 51% of respondents
expect trading administrations to
increase in 2012. This is, of course,
from a relatively low level. The same
percentage of respondents expect pre-
pack administrations to increase.
Fig 10: Looking at the next 12 months, do you
expect the number of trading administrations to
Stay the same Increase
Decline
5%
44%
51%
Fig 11: Looking at the next 12 months, do you
expect the number of pre-pack administrations to
Stay the same Increase
Decline
3%
46%
51%
14 The Restructuring Outlook for 2012

15. About ‘Restructuring
Outlook for 2012’
This is a survey of UK restructuring/recovery
bankers, asset based lenders and restructuring
advisers including senior turnaround professionals.
It rates the prospects for UK businesses in 2012
and provides insights into the restructuring
strategies employed in the market and the
key sectors expected to be vulnerable in 2012.
Responses were collected online from 9 Jan
2012 to 20 Jan 2012. In total 183 respondents
participated, breaking down into 48 %
restructuring and recovery bankers, 27% live
side bankers, 7% asset based lenders and 18%
turnaround executives and other restructuring
advisers.
Respondents work with UK businesses of
all sizes, in terms of debt this breaks down into,
20% of respondents work with businesses owing
+£50million, 16% owing £25-50million, 36%
owing £5-25million and 28% owing £0-5million.
The Restructuring Outlook for 2012 15

16. Contact us
Mark Byers David Dunckley Geoff Davies
Partner Partner Partner
Global Head of Restructuring Head of Mid Market Restructuring Head of Corporate Finance
T 020 7728 2522 T 020 7728 2408 T 012 2322 5630
E mark.r.byers@uk.gt.com E david.dunckley@uk.gt.com E geoff.davies@uk.gt.com
Stephen Rigby Mo Merali Jeremy Toone
Partner Partner Partner
Head of Performance Improvement Head of Private Equity Head of Real Estate Advisory
T 020 7865 2101 T 020 7728 2501 T 020 7865 2314
E stephen.rigby@uk.gt.com E mo.merali@uk.gt.com E jeremy.m.toone@uk.gt.com
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