Outlook 2010

Still crystal ball gazing?

January 2010

Restructuring and Recovery

Real people, real solutions
A rocky road to recovery
In brief
• Recession formally ends
• General election to determine
the course of government tax
measures
• Rates of inflation, interest and
growth all low in 2010
• More insolvencies, more
Commentators are saying that the recession is as good as
over – but it may not feel like it.
Baker Tilly’s twice-yearly Finance Directors’ perceptions survey, published
in November 2009, revealed that just over half of all respondents (54%)
expected no improvement in trading conditions for their business over the
next 12 months, while more than a further quarter (28%) expect trading
conditions to worsen throughout 2010.

“
unemployment likely 2010 looks set to be a long, hard slog and there will be
some more pain, in terms of additional insolvencies and
further job losses, on what will undoubtedly be a rocky road

”
to recovery.
Tracey Callaghan, Head of Restructuring and Recovery

A premature optimism?
Yet the Organisation for Economic Co-operation
and Development (OECD) optimistically said in
its November economic outlook: “The [UK]
economy is set for recovery, supported by
improving financial conditions, an expansionary
monetary policy and stronger international
growth. However, the pick-up will be slow with
GDP projected to grow by slightly more than
1% in 2010, reflecting strong headwinds from
balance sheet adjustments, a still weakening
labour market and fiscal tightening.”
It goes on to add that it will not be until
2011 that the recovery will “gain
momentum” and then estimates that
unemployment will reach 9.5%, although
inflation is likely to remain less than 2% and
interest rates are also set to stay low.
In early December, the Institute of Directors’
Chief Economist and Executive, Spencer Dale,
was a little more upbeat: “The economy
appears to have turned… We are likely to be
moving into a period of renewed expansion”.
He says that the weak sterling will give a
boost to exports and now that companies
have had an opportunity to reduce their
inventories, they should be in better shape.
He goes on to refer to how fragile such a
recovery may be and that the Government
should not pursue policies that may damage
its nascent green shoots.

2 Outlook 2010 www.bakertilly.co.uk

 “ Global factors will continue to impact on how
fast the UK will emerge from this recession. Can we
be competitive again or will we lose out to faster

”
moving economies?
Geoff Carton-Kelly, Head of Special Investigations and Baker Tilly International contact partner

And that is what it has done, if you believe Geographic ripples

that good economic intentions underpin
Alistair Darling’s Pre-Budget Report (PBR).
There were no immediate significant tax
rises. Yes – public sector cuts will follow.
VAT returned to 17.5% from January 1.
The overall thrust was continued support for
the recovery.
Easing the woes
One of the big questions for 2010 is what
will replace quantitative easing (QE),
expected to be phased out in February,
especially as the PBR made reference to
£175 billion of additional debt-raising in the
pipeline? And a second question – what will
it ultimately cost the UK taxpayer?
The Confederation of British Industry (CBI)
was forthright in its criticism of the PBR:
“There were two tests for the Pre-Budget
Report. First, would it increase the credibility
of government plans to restore the public
finances? Second, would it be a platform for
job creation and economic growth? The
Government has failed on both counts. It is
a serious mistake to impose an extra jobs
tax at a time when the economic recovery
will still be fragile. Increasing National
Insurance contributions will hold back job
creation and growth and there has also been
little effort to improve further the public
finance position. Rather, the PBR states that
the measures announced amount to a fiscal
loosening rather than tightening.”
At this point, most would agree that the
solutions to both of the CBI’s challenges will
not take shape until after the election. As
Fitch, the ratings agency, puts it: “Everything
hinges on the election, what measures will
be put in place and how draconian they are
going to be. In this respect, a hung
parliament may be the worst outcome
because it would allow less freedom to take
severe and effective economic measures.”
Meanwhile, the recession, which initially hit
harder in the South of England, has travelled
further north. As Baker Tilly’s discussions among
its clients in the North and Midlands have
highlighted, manufacturing, which was already
weakening, has been hard hit in those regions.
Yet Scotland, outside of the financial and
property sectors, has so far not been as badly
affected. “There are fears, however, that the
recessionary shockwave will soon hit other
sectors of the economy north of the border,
particularly due to its heavy dependence on the
public sector,” according to Edinburgh-based
partner, Keith Anderson.
The CBI’s end of December economic forecast
predicted that Q4 2009 would be when the
country emerged from recession but it, along
with Bank of England Governor, Mervyn King,
predicts a long, slow haul. There is some
evidence, however, from the Engineering
Employers Federation to suggest that some
manufacturing businesses are moving
production back to the UK. This is due to
concerns about the quality of goods produced in
a number of low-cost locations and the stability
of some overseas manufacturers.
A restored confidence required
“Although the first few months of 2010 will be
difficult,” predicts CBI Deputy Director-General
John Cridland, “growth will gradually pick up
and increasing confidence and demand will lead
the UK into a more positive 2011. Consumer
spending looks to be slightly more resilient than
we first thought, and a weaker pound will help
to support export growth. However, the economy In November and December 2009, we hosted a number
will be on a fragile path of very slow growth, as of regional roundtable dinner discussions to address
we continue to feel the lasting effects of the some of the defining factors at play in the UK national
and regional economies. The Rt Hon Michael Portillo and
financial crisis.”
Kevin Butler, South West regional agent for the Bank of
England, were guest speakers at our Bristol roundtable
Some glimmers of recovery might be starting to and are pictured here with Baker Tilly Restructuring and
filter through, but as with any retreating recession, Recovery partner, Andrew Sheridan.
the recovery period will present fears of a ‘double
dip’ and a new set of hurdles for UK PLC.

“ With so many variables at play in the current UK

economy, it is not surprising to see such a strong degree of
uncertainty amongst finance directors on the outlook for

”
the year ahead.
Bob Bailey, Restructuring and Recovery partner, Birmingham

Outlook 2010 3
Factors at play
In brief
• Government funding will be a
major issue
• Tax rises after the general election
• Capacity gap to narrow in
second half of year
• Company failures, personal
insolvencies and unemployment
all likely to rise
• Sources of funding may
increase – banks and
capital markets
• Less visible pension
deficiencies may bring about
corporate distress
How 2010 pans out will very much be a consequence of
the financial crisis, the recession which followed and the
measures necessary to shift towards recovery.
Because the shape and speed of the recovery are uncertain, no-one can
predict with any certainty the exact path through the next 12 months.
Some of the factors that will shape the UK business environment, however,
are now becoming slightly clearer.
Quantitative easing banks could be required to buy as much as
To 10 December 2009, the Bank of £200 billion worth of gilts as additional
England’s asset purchase programme had support for their capital bases, under
disbursed £188.4 billion. £186.4 billion proposals put forward by the Financial
of this was accounted for by holdings Services Authority for implementing
of government debt in the form of amendments to the EU Capital
gilt-edged securities. The take- Requirements Directive.
up of corporate bonds and
commercial paper together Meanwhile, as confidence
accounted for not much builds in some quarters and
more that £2 billion. This growth in the economy
quantitative easing process accelerates, albeit perhaps
is expected to end in February. falteringly in the early months of
the year, the banks are expected to
However, the market in gilts is gradually lend more, taking the
sufficiently deep and liquid that pressure off the Bank of England.
further issuance of gilts looks Moreover, capital markets are
certain to be able to be absorbed. predicted to loosen, providing
In addition, it appears that the scope for new issues of both
corporate debt and equity.

4 Outlook 2010
 “ Only when the capacity gap has narrowed sufficiently
will the downward trend reverse. Most economists are
suggesting that this might not be the case until at least

the second half of the year.
Andrew Sheridan, Restructuring and Recovery partner, Bristol
Capacity gap
The UK begins 2010 with a significant gap
between what the economy can produce
and what can be sold, either domestically
or abroad. This ‘capacity gap’ contains
much of the pain still to be felt by
businesses during the year.
Further company failures are likely to follow.
As is often the case, businesses continue to
suffer for some time after recessions may
officially have ended. This in turn causes a
withdrawal in demand for the goods such
companies would have bought from their
suppliers and so leads to further job losses in
the supply chain. Higher unemployment
inevitably leads to lower consumer demand.
Cashflow and liquidity
The number of companies suffering from
late customer payments more than doubled
in the previous six months, according to
Baker Tilly’s Finance Directors’ perceptions
survey, published in November 2009.
Our twice-yearly survey, showed that 41% of
finance directors reported problems with late
payments – more than double the 19% who
reported this as an issue in our March survey.
Increasingly, businesses are having to fund their
working capital through stretching credit terms
with their suppliers, as they cannot rely on
invoices being paid on time. This is creating a
chain reaction throughout the economy and it is
likely that we will see more companies go
under as pressure on working capital increases.
Throughout 2009, the issue of funding for
businesses became somewhat clouded. On
the one hand, bankers were telling us that
they were ready to lend but demand was
weak. On the other, policies of rebuilding
bank balance sheets by reining in loan-to-
value ratios, ‘normalising’ lending criteria
”
and tightening credit procedures may also
have restricted the availability of funding.
Additionally, industry statistics from the
asset-based lending sector show that the
average loan-to-asset value has reduced by
6% to just over 50% in 2009 – which
appears to have resulted from a combination
of lack of demand, a tightening of credit
policy and the number of company failures.
There are, however, rays of hope for greater
availability of funding in 2010. The Enterprise
Finance Guarantee (EFG), aimed at improving
the flow of working capital for small
businesses, has been extended by a further
year to 31 March 2011. Although the take up
of EFG has been patchy to date, this, linked
with greater willingness of banks to loosen
their lending criteria having worked through
their own balance sheet difficulties, is a
positive sign. Moreover, following the Bank of
England’s decision on 7 January to hold the
base rate at 0.5% for a tenth consecutive
month, City analysts and economists are
expecting that interest rates will stay low for
the foreseeable future, despite the risk to
inflation, in order not to stifle the early stages
of growth in the economy.
Unemployment
The unemployment rate for the period
August to October 2009, as reported in
December by the Office of National
Statistics, was unchanged on the previous
quarter at 7.9%. The number of
unemployed in the UK during the quarter
totalled almost 2.5 million.
These statistics will be watched closely as
we move further into 2010, because there
is a suspicion that though recovery may take
hold, it may not do so quickly enough for
some companies – leading them to fail and
adding to the jobless total.
HMRC’s attitude to
tax payments
Over the last 18 months, the Government
has been increasingly supportive of
companies who are struggling in the
recession and have fallen into arrears with
PAYE/NI and VAT, as shown by the fact that
over £4.3 billion of tax has been tied up in
almost 250,000 deferred payment schemes
over that period. We believe that, going
forward, HM Revenue & Customs (HMRC)
will adopt a twin-pronged approach.
“HMRC will continue to agree to deferred
payments,” explains David Hudson, partner
and London Head of the Formal Insolvency
team. “At the same time, as we have seen
in the groundbreaking case of Southend
United Football Club, it will consider an
application for administration order. In this
matter, Baker Tilly were the proposed
administrators. It now appears that HMRC
is taking a more commercial approach, as
highlighted in the December’s PBR, where
in some cases, it may call for an
Independent Business Review from a third
party firm of accountants that will form the
basis of efforts to help the business survive.”
However, HMRC is becoming tougher on
those businesses that have not kept to their
original payment plans. It also appears
unwilling to accept delayed payment
stretching past 12 months and it is now
much harder to agree anything over 6
months – with, as recently reported, around
60% agreed for only 3 months. HMRC’s
stance when companies are unable to meet
repayment plans suggests that it will not be
able to be as supportive to ailing companies
as it has been in the recent past, assessing
and monitoring the risks involved and
agreeing time for businesses ‘that are not
viable and will later fail’.
“Our advice to businesses,” David
continues, “is to be open with HMRC. Set
out the true state of the business and enter
into a dialogue. Communication is vital. Be
prepared to work with the Crown and they
are likely to be prepared to work with you.”

“ This is a time for management to act. Strong cash and

working capital disciplines need to be displayed to retain
control over viability. Failure to do so is increasingly leading to David Hudson is a

”
other stakeholders making the decisions for them. partner and London
Head of Formal
Peter Cooper, Head of Corporate Restructuring Insolvency.

www.bakertilly.co.uk Outlook 2010 5

 “ The predicted increase in the base rate later this
year may be the last straw for those people who are
currently able to manage their finances on reduced

”
hours of work.

Asset-based lenders Alec Pillmoor, Head of Personal Insolvency, Hull

move centre stage Personal Insolvency debt that they can no longer service, will
One of the consequences of the explosion in all be factors that support this view.
Despite immense political pressure to lend,
most commentators believe the banks will consumer debt over recent years has been
remain only semi-open for business for the increased number of people who have Public spending cuts
some time to come. 2010 will feature been unable to meet their repayment The PBR contained little detail on the subject
re-organisation for many as well as a obligations and subsequently entered into of public spending cuts, although all political
‘finding of feet’ period, as they adjust to a insolvency. The result has been an increase parties agree that they are inevitable. It is
new order of business – with government in personal insolvencies over the last decade. widely expected that once the general election
influence over lending markets and indeed This has been exacerbated with the credit has taken place, the new government will
its control of some of the principal players. crunch, as income levels have fallen. 35,242 move quickly to address this – whichever the
This, together with an uncertain economic people entered an insolvency process in the political party. The Institute of Fiscal Studies
environment, is bound to affect decisions
third quarter of 2009 – over 6,000 more has calculated that significant cuts across
by banks on lending requests, particularly
than in the whole of 1999. public services will be necessary if the
from new businesses or those looking to
increase their levels of funding. Chancellor is to fulfil his budget plans for
Moving into 2010, it is anticipated that the health, police and education. Consequently,
However, asset-based lenders (ABLs) – level of personal insolvencies will continue to as we go to press, the outlook for public
institutions securing lending against the increase. A reduction in real incomes with the sector funding is uncertain and businesses,
receivables and other business assets – have
lack of available overtime, reduced working analysts and public sector employees
been rapidly re-adjusting and are eager to
hours agreements and people searching for themselves await developments post-election
press forward. With a more secure position
than other lending structures, the ABL viable solutions to historically high levels of with some degree of trepidation.
industry has a proven track record of
enthusiastically supporting businesses going
through change – be it a change in
ownership, growth or turnaround. The ABL
sector will not shy away from challenging
propositions from borrowers, particularly
now that the economic climate appears to
be stabilising.
There are also regulatory drivers which make
this form of lending attractive to institutions,
as a consequence of the capital adequacy
implications of the Basel ll accord. In simple
terms, this means that institutions will
achieve greater returns from asset-based
lending in comparison to most other senior
debt structures.
The decade to 2008 saw a four-fold increase
in the total amount of lending to businesses
from the ABL sector. Industry statistics for Q3
2009 provide evidence that the sector is
once again expanding. Asset-based lending
has moved into the mainstream and my
personal opinion is that the sector will deliver
double-digit growth in its total lending to
businesses in the UK during 2010.

Steve Merchant is a
Director and Head of
Asset Based Lending.

6 Outlook 2010
 “ An increasing number of pension schemes are seen
as a huge millstone around the sponsoring employer's
neck, massively disproportionate to the employer's size

”
and ability to fund.
Bruce Mackay, Head of Covenant Assessment Services, London

Pensions deficiencies Unlocking the value of disputes

The effect of shortfalls in company defined benefit
pension schemes is often greater than it appears.
This, says Bruce Mackay, Baker Tilly’s Head of
Covenant Assessment Services, is because there
is often a significant difference in the published
accounting position of a company pension
scheme and the ‘real’ funding position. We have
recently seen as a hurdle in a number of potential
M&A deals, with the acquirer often initially
unaware of the full deficit value. Moreover, with
only so much cash to go around and with other
stakeholders’ demands on that cash, often more
strident and sold as ‘more urgent’ than those of
the pension scheme trustees, there is a risk of
further serious deterioration in the funding
position of many pension schemes. Therefore, for
trustees and members, it pays to ask questions
so that the scheme deficit attains the
transparency and priority it deserves in order to
protect members’ benefit.
The number of disputes typically rises in times
of recession. However, the costs of pursuing a
claim can be high and the outcomes uncertain
and many cash-strapped businesses will fail to
pursue legitimate claims. Forensic Services
partner, Tony Chapman suggests businesses
may not be aware of the availability of litigation
funding. “This is a relatively new concept which
allows claimants to unlock otherwise hidden
value from disputes”, he says. It works by
instructing a law firm who will run the claim on
a contingent (CFA) basis – reduced rates but
with a success fee – backed by a litigation
funder in return for a share of any proceeds and
with insurance against the adverse costs risks.
Tony adds: “Whilst the level of fees may be
high, they will be met either from the costs
awarded in a successful claim or by the
litigation funder and therefore it de-risks the
process and makes it affordable”.

“ Litigation funding ought to make it easier for struggling

companies to pursue claims. There are now a number of
funders looking to buy a slice of the action. However, as
they typically require a 30-40% share of damages, it is

”
expensive funding compared to other sources.
Tony Chapman, Forensic Services partner, Leeds

www.bakertilly.co.uk Outlook 2010 7

Industry outlook
Having explored the
economic backdrop and
factors at play for the year
ahead, what will this all
mean for the UK’s major
industry sectors?
No single sector is out of the water –
and all will undoubtedly see further
casualties throughout the next 12
months, with highly-leveraged
businesses at greater risk.
However, the fittest companies,
irrespective of their industry sector, will
see the ongoing recession as an
opportunity to focus on their key
offerings, forward strategies and
potentially grow their market share.
In brief
• No sector ‘recession-proof’ – but
some will be quicker to recover
• Consumer sectors trading in ‘non-
essentials’ still likely to struggle
due to cautious spending
• Continued recession offers most
industrial sectors an opportunity
to review stock levels and supply
chain efficiencies
• ‘Fittest’ businesses in each sector
best prepared for recovery
8 Outlook 2010
Construction and housebuilding
“Unlike other parts of the economy, [the UK construction
sector] seems unable to escape the shackles of recession,
as it entered its 22nd successive month of decline,” said
David Noble, CEO of the Chartered Institute of Purchasing
& Supply, earlier this month. A few headline projects
aside, including the development of the facilities for the
London 2012 Olympics, major new projects are sparse.
Anticipated public spending cuts may cause projects to be
re-scaled, postponed or even cancelled during 2010.
Housebuilders, facing their own obstacles to recovery, are
faring better generally than infrastructure players. For most
smaller housebuilders, the 2010 outlook is particularly
daunting. Many are holding stocks of unsold properties
that are proving difficult to sell and have been forced to
pick up what work they can and have cut staff against
reduced order books.
Yet for several of the larger players, like Persimmon,
rising house prices – driven by recovering demand – is
encouraging new activity. Whilst credit conditions remain
tight, it ‘remains cautious’ and has managed down its
debts from £1.2 billion to £270 million as a result of
strict cash controls, yet has ‘continued confidence in the
long-term future of the UK housing market’. Barratt is
also resuming construction on eight sites, backed by
increased demand. Meanwhile, building products groups,
Marshalls, said that although it remained cautious about
the short-term outlook, installer order books at the end of
October 2009 were an encouraging 8.1 weeks compared to
6.4 weeks for the same period the year before, driven
largely by a tentative recovery in the housing market and
demand generated by the London 2012 Olympics.
Challenges: Falling sale prices on developments against
original land prices are squeezing profit margins;
difficulty for home owners to sell existing properties to
buy new and first-time buyers to acquire mortgages
without significant deposits and the risk of rising
interest rates adversely affecting mortgage uptake
overall; banks’ reduced appetite to fund developments or
guarantee low loan-to-value ratios; maintaining a skilled
workforce during periods of low activity.
Opportunities: Reported signs of economic recovery
should lead to greater consumer confidence and
increased purchasing activity; stronger players in the
market can increase market share as weaker competitors
inevitably fail; unallocated contract opportunities will still
exist on London 2012 projects for larger players.
Phil Pierce
Restructuring and Recovery partner
Leeds
Tel: 0113 285 5000
Property
There is some, albeit muted, optimism in both commercial
and residential property. Low asset prices are contributing
to higher yields on commercial property, attracting
investors back to the market. Alan Lovett, Head of
Property, Restructuring and Recovery says: “Commercial
property with a strong covenant will continue to attract
investors, especially as the base rate is expected to remain
low for at least the first half of this year.” However,
further investment will depend on an overall relaxation of
bank funding, which has been particularly fluid in this
industry historically.
Property company, Telereal Trillium, recently announced it
is selling a £475 million portfolio of prime London office
space. This signals restoring confidence that buyers are
returning to the market. This is not a first, with several
overseas buyers, including sovereign wealth funds, having
already acquired property in the UK, taking advantage of
low asset prices coupled with the decline of sterling
against most major currencies. Meanwhile, tenants are
seizing opportunities to reduce rates or exit from leases,
exerting downward pressure on rents overall. However,
those with depressed revenues or low cash reserves, may
struggle to meet regular payments to their landlords.
In residential property, there are a spectrum of views. On
the one hand, the Royal Institute of Chartered Surveyors’
in December said that, despite the increasing number of
new instructions, house prices were also rising overall –
as demand exceeded supply in some regions, particularly
the South East. However, others warn of the risk of a
double dip in house prices and a further fall over the next
12 months. Peter Bolton King, Chief Executive of the
National Association of Estate Agents talks of a “wait-
and-see attitude to housing” in early 2010, as potential
buyers study what tax changes will mean for them and
how the election is likely to play out.
Challenges: Residential property faces variable factors
making planning difficult; tougher lending criteria against
a slight increase in mortgage availability will impact on
demand; commercial property players restricted by the
availability of reliable and solvent tenants; the impending
General Election will cause uncertainty, impacting on home
buyers/investors’ purchasing decisions.
Opportunities: Asset prices remain low overall, offering
opportunities to those with the cash and the confidence to
buy while the base rate stays low; if sterling declines
further, more foreign buyers are likely to enter the market;
as lending increases prices will begin to creep up.
Alan Lovett
Head of Property,
Restructuring and Recovery
London
Tel: 020 7002 8600
 Manufacturing
“Whilst conditions are continuing to improve on the back
of recovering world markets and a weaker currency, there
is little to suggest that we are in for anything other than a
long, slow haul out of recovery.” Chief economist of the
Engineering Employers Federation, Lee Hopley, paints a
challenging picture. He continues: “Manufacturers have
been grappling with extremely difficult trading conditions
for more than a year now, but we’re not out of the woods
yet and a great deal of economic uncertainty remains.”
Although in July, the Government launched a £150
million package to assist manufacturers to take
advantage of new technologies, this is relatively small
beer and will do little to assist traditional, low-tech
businesses. However, 2009 closed with some relatively
encouraging news. The monthly Purchasing Managers’
Index (PMI) produced by the Chartered Institute of
Purchasing & Supply rose at the fastest pace for two
years. The PMI collates, among other things, data
gathered from purchasing managers about levels of
production and new orders. While one such report does
not necessarily signal that recession in manufacturing is
over, it does provide some scope for optimism.
Russell Cash, one of the partners in our Manchester office
involved in the administration of WH Crossley Ltd, a niche
manufacturer to the rail industry, says that it is certainly
challenging times for manufacturing businesses: “Survival
in the current climate depends to an extent on where a
business sits in the food chain. Some smaller businesses
may find they have little negotiating power and are being
squeezed at both ends by customers stretching payments
and by suppliers demanding shorter payment terms.
Larger businesses may be able to take advantage and
dictate terms to an extent.”
Challenges: Decisions over job losses or less painful
efficiencies to improve working capital such as improved
stock control; releasing slow-moving stock at discounted
prices; greater focus on chasing outstanding debtors;
renegotiation of contracts with various service providers
wherever possible.
Opportunities: Acquisition of distressed competitors to
increase capacity or market share; recruitment of best
talent from collapsed competitors; ideal time to focus
further on customer care and quality assurance.
Russell Cash
Restructuring and Recovery partner
Manchester
Tel: 0161 830 4000
www.bakertilly.co.uk
Hi-tech
The hi-tech industries, which generate 10% of UK GDP
and 15% of UK trade, have been hit hard by the
recession. Fund providers, have increasingly been, and
continue to be, very selective about which businesses and
R&D projects they support. Funders may toughen their
approach as they decline to invest new money – which
such progress industries rely on – without guaranteed
returns or even seek to recover initial investments through
the sale of the businesses they have lent to.
According to Intellect, the trade association for the UK
technology industry: “SMEs tell us that investment funding
is still an issue. Traditional sources of cash such as bank
loans have been restricted or withdrawn and there is a
shortage of venture capital funding. As a result,
expansion, product development and other R&D activities
are being held back.”
Few players in the sector have managed their cash
reserves well and rarely allow themselves to try to resolve
their financial issues, in often ‘just in time’ pipelines.
Where solutions are derived, these are often sales driven,
which is usually the area of their business least under
their control.
In 2009, Graham Bushby, a partner in our Birmingham
and Milton Keynes offices, worked on the administration
and subsequent sale of Cecure, an online poker gaming
platform. Commenting on the sector, he says: “Concerns in
2010 are unlikely to lessen sufficiently. Future worries for
the sector include limited access to funding, generally
weak and volatile demand levels and a growing range of
supply issues throughout the value chain.”
Intellect goes on to challenge the UK’s technology
framework saying that certain segments of the industry
are ‘at risk of being constrained unless a fit for
purpose digital infrastructure and adequate support are
brought forward’.
Challenges: Limited credit available; funders toughening
their approaches and seeking ‘guarantees’ against returns;
weak demand levels both domestically and internationally.
Opportunities: To focus on key business areas and core
offerings; potential rewards for smarter sales and
marketing drives; chance to review supply chain
efficiencies and further reduce unnecessary costs.
Graham Bushby
Restructuring and Recovery partner
Birmingham/Milton Keynes
Tel: 0121 214 3100
Distribution and logistics
The second half of 2009 saw over a quarter of all
businesses in the sector make job cuts. However,
perception amongst the industry is that job losses for
2010 should be less than in other sectors and the bottom
of the recession has been reached for the sector. Over
one-third of businesses optimistically expect to see
growth during 2010.
As the performance of this industry fundamentally hinges
on demand from both ends of the supply chain, tough
times for both manufacturers and retailers hit this sector
hard. This particular recession has been more global in its
impact and therefore, the prospect of distribution
worldwide has not been available to offset the internal UK
slump. Survival remains key for 2010 and the prospect of
further mergers and acquisitions by some of the larger
players is likely as they aim to grow market share.
Those businesses who have viewed the recession as an
opportunity to re-evaluate their strategic plan for the
future of the business – implementing cost savings
and other efficiencies – should find themselves in a
much stronger position once the recession formally
ends and business levels start to increase. Almost two-
thirds of UK transport and logistics businesses feel the
recession has made their operations more efficient and
see other positives, including a greater focus on
servicing their customers (34%), according to recent
research from Barclays.
As with all recessions, the key now for this sector is to
ensure that there is sufficient cash to continue to trade
when business starts to pick up – in particular, to take
advantage of what could be seen to be cheap UK goods
being imported into the eurozone following the slump in
the value of sterling over the last 12-18 months.
Challenges: Heavy dependency on the fate of supplier and
customer bases; seeking out new business in an ever-
competitive marketplace; maximising working capital and
reducing day-to-day operational costs; overseas and UK
markets both impacted by global recession.
Opportunities: Chance to review or re-assess efficiencies
and longer-term vision of the business; M&A opportunities
for those looking to acquire distressed businesses in order
to grow market share or move into new service areas; a
competitive edge when market recovers for those who
have made necessary provisions during the recession.
Matt Wild
Restructuring and Recovery partner
Guildford
Tel: 01483 307000
Outlook 2010 9
Sectors (continued)
Retail
Despite the 0.3% fall in UK retail sales for November,
according to the Office of National Statistics, and a
harsher winter than expected, sentiment in trading over
Christmas remained positive for most retailers. Record
Boxing Day sales, an impending VAT increase and low
interest rates certainly helped footfall and increased
retailer confidence. The London market has also been
significantly bolstered by eurozone shoppers seeking value
outside their home countries.
Homeware and big ticket items traded strongly pre- and
post-Christmas, as did both luxury stores such as
Selfridges with sales up 16% and discounters including
Matalan up 13.7%. Next also announced better than
expected results for both its stores and Directory business.
However, the picture was more mixed across the high
street. Despite a first return to sales growth in two years
for Marks & Spencer, which had an overall ‘good
Christmas’ according to its Chairman, Sir Stuart Rose, its
share price still fell by 6.8%.
Consumers will undoubtedly rein in their spending during
early 2010. With the economy still in recession, predicted
unemployment ranging up to 2.8 million, an upcoming
election and uncertain tax regime, the consumer economy
is likely to start slowly in the first half of the year.
Stephen Robertson, Chairman of the British Retail
Consortium says: “The impact of the VAT increase is a
concern but other clouds are gathering. Customers are
cautious, jobs are a big worry and neither will be helped by
the tax battering promised by the Chancellor.” Sir Philip
Green added that it would be “a very challenging, tough,
competitive landscape without change... until the general
election is out of the way”. The likelihood is sales will be
broadly flat. Customers will continue to seek value and
brands that have traded well so far during the recession
should continue to benefit.
Challenges: Maintaining a value proposition for
consumers who are facing impending personal tax
hikes; public and private sector job uncertainty and
expectations of mortgage rate increases in later 2010
will impact on consumer spending overall; 17.5% VAT
impact on pricing; rent and corporation tax due in
January, March’s quarterly rent ‘roll’ and a less
accommodating HMRC.
Opportunities: Favourable leasehold renewal climate;
lower inventory levels; increasing promotional activities
to drive footfall and focus on value.
Lindsey Cooper
Restructuring and Recovery partner
Manchester
Tel: 0161 830 4000
10 Outlook 2010
Motor
At the start of the recession, no other sector suffered
as dramatically as car retailing, as an almost instant
reduction in demand for new cars caused an immediate
flurry of weaker players to leave the industry.
The underlying theme for 2009 in the sector was ‘great
escape’. New car sales fell by almost 26% in the first
half of the year, yet in the second half grew by 21% –
thanks to the Government’s scrappage scheme.
However, the net fall resulted in the lowest number of
new registrations since 1995, according to the Society
of Motor Manufacturers and Traders (SMMT).
At the end of 2008, manufacturers quickly reduced
supplies of vehicles by putting their factories on short
working which led to a shortage of product in 2009 and
an increase in margins for dealers, as the industry
moved away from a ‘pile them high and sell them
cheap’ mentality. Additionally, the scrappage scheme
increased footfall overall, even though the direct
beneficiaries tended to be smaller models and a few
suppliers who currently see over 60% of their sales
supported by the scheme.
“As we reach the beginning of 2010, the majority of
the retail motor industry is breathing a sigh of relief
for surviving the year – something which looked
unlikely in Autumn 2008,” says Graham Bushby, Head
of Motor for Baker Tilly Restructuring and Recovery.
“But as VAT returns to 17.5% and the scrappage
scheme comes to an end in early 2010, the going is
likely to get a lot tougher again for the industry over
the year ahead.”
It’s not surprising therefore, as our second Retailing in
the Recession survey with Motor Trader magazine
found, the majority of dealerships (59%) do not
expect the sector to pull out of recovery until at least
early 2011.
Challenges: Scrappage scheme coming to an end early
this year; the return of 17.5% VAT; a cautious-spending
public fuelled by jobs uncertainty and predicted post-
election mortgage rate increases.
Opportunities: Scrappage scheme has grown market
share for certain manufacturers and dealerships to build
on; consumers with low personal debt are more likely to
purchase brand new vehicles cost-effectively.
Graham Bushby
Head of Motor,
Restructuring and Recovery
Birmingham/Milton Keynes
Tel: 0121 214 3100
Leisure and hospitality
Heavily dependent on consumer spending, the sector will
find 2010 another challenging year. Rising living costs,
increasing unemployment and jobs uncertainty will all
force consumers to keep a close eye on their disposable
income and demand bargain offers.
Pub drinking declined sharply in 2009, with 11 pubs
closing every week in London alone, according to new
figures issued by the British Beer & Pub Association
(BBPA) – and hitting other regions hard. In response,
campaigners for the pubs industry are calling on the
Government to reverse the 8% increase in duty on beer
imposed after VAT cuts last January, now the 17.5% rate
has returned – and to scrap the proposed 2% above
inflation increase, in this year’s Budget. Yet, as the
Chancellor sees an 84% share of the £8.6 billion total tax
and profit on beer sales, this will be a battle.
The gambling industries have a mixed outlook overall.
Although the ‘recession opportunists’ spend more in
downturns and 2010’s major sporting events provide
industry optimism, changes to gambling licence rules and
the smoking ban were key factors behind Agora, a high-
street chain of adult gaming centres, going into
administration with Baker Tilly in late 2009.
In contrast, confidence amongst the UK hotel industry is
restoring, according to the latest Hotel Confidence Monitor
from TRI Hospitality Consulting, with half of hotel
managers ‘more optimistic’ in Q4 than Q3 2009, bolstered
by Christmas trading. According to Bob Cotton, Chief
Executive of the British Hospitality Association, “innovative
and sustained marketing programmes, professional
management [and] rigorous cost controls” lead to fewer
hotel insolvencies than expected for 2009. Last year, Baker
Tilly traded and sold a number of high-profile hotels,
including The Forbury in Reading and Haleys in Leeds.
Challenges: For hotels, price-sensitivity will result in a
decline in average room rates, squeezing margins;
business travel looks to be further replaced by networking
technologies, such as conference calling; jobs uncertainty
and rising living costs increase consumer reluctance to
spend on leisure pursuits; the 17.5% VAT rate return is
already hitting hard, particularly in the pubs segment.
Opportunities: A change in government could lead to a
change in tax for the beer and pub industries; a ‘stay
home’ mentality during recessions presents continued
opportunities for domestic tourism, particularly in regions
hit hard in other industries.
Simon Bower
Restructuring and Recovery partner
London
Tel: 020 7002 8600
 Travel
2010 will be another difficult year for the travel industry,
as it relies heavily upon an improvement in consumer
spending and overall confidence – according to Baker Tilly,
an ABTA travel industry partner. The need for a review of
consumer protection will be high on the agenda for the
year, in view of recent failures such as Flyglobespan, the
collapsed Scottish airline. ‘The unexpected’ – such as
terrorist threats and potential epidemics – are also likely
to impact on confidence.
Whilst 2009 saw a 10% year-on-year fall in passenger
numbers, the level was still higher than in 2002,
illustrating the level of growth in recent years. Tour
operators responded by making capacity cuts to protect
themselves, in contrast to the dramatic falls in profit that
have hit airlines. The industry generally adapted well last
year – but could it cope with a similar fall over the next
12 months?
European destinations have been damaged by exchange
rates and 2009’s poor euro/pound conversion looks set to
continue. The pound/dollar ratio looks more settled at a
respectable 1.6.
Agents will be looking for continued growth in e-sales and
observers will be interested to see how the industry
utilises new media, such as social networking, as a
marketing tool.
The World Cup, Winter Olympics and Ashes will all ensure
a bumper year of sports travel in 2010 – however,
inherent to this will be the growing risk of fake ticketing
scams and uninsured travel packages.
Mark Wilson, a partner in our Watford office
comments: “Innovation and highly competitive
marketing activity will undoubtedly be key for survival,
together with a strong focus on the end consumer, as
the industry aims to restore public confidence.”
Challenges: Strongly dependent on overall consumer
confidence; trend towards ‘stay home’ vacations in the
UK; strength of the euro against sterling; anticipated
increase in unemployment leading to consumer hesitation
in making bookings; expected increases in mortgage rate
in late 2010 will impact on consumer spending.
Opportunities: Promote non-eurozone destinations, such
as Turkey; online sales still present an opportunity;
consolidation to increase market share; long-term
prospects for the industry still remain strong overall.
Mark Wilson
Restructuring and Recovery partner
Watford
Tel: 01923 816400
www.bakertilly.co.uk
Professional practices
‘Best in class’ professional practices, having staked out a
strong market presence and respected position in their
chosen markets, are likely to fare better in 2010 than their
competitors – unless their specialism happens to have
been recession-hit, such as conveyancing.
Consolidation among the stronger firms looks likely to
continue, as the main players seek out attractive
acquisitions. Whether in accountancy or law, two weaker
firms may add up to a stronger one. Alternatively,
combining complementary skills, while reducing
administration and other overheads, can ensure a
profitable future.
Without doubt, the single biggest concern for the year
should be cash. Firms need to be invoicing clients as early
as possible, chasing receivables efficiently with every
effort made to haul in cash. With plenty of calls on clients’
scarce resources, creditors that make the most noise are
most likely to get paid. Inventory management and timely,
even daily, management information will therefore remain
crucial to keeping a tight grip on the business.
With HMRC still ranking high among many firms’
creditors and tax bills due on 31 January 2010, now is
also the time for them to consider whether it is necessary
to apply to HMRC under the Business Payment Support
Service to arrange more time to pay tax bills.
The sector should hold up fairly well but is not recession-
proof, as evidenced by more firms going out of business
during the last recovery than in the preceding recession
and a predicted rise in insolvencies for 2010, particularly
at the smaller end of the spectrum.
Challenges: Maintaining clients in an extremely
competitive market; decisions over staffing levels to
ensure production levels can be maintained and
opportunities grasped, at the same time ensuring recovery
rates are maximised; working capital remains key so
timely billing and debtor collection are vital.
Opportunities: Current downturn and the accessible
resource pool represents an opportunity to diversify into
new markets; acquisition/merger with distressed
practices to enhance specialisms offered and gain entry
into new markets.
Tony Wright
Restructuring and Recovery director
London
Tel: 020 7002 8600
Charity and not-for-profit
The ‘third’ sector appears, in the main, to be
weathering the current economic downturn relatively
well. However, it can expect tougher times in the next
12 months with no anticipated marked improvement
until the second quarter of 2011, according to our
recent survey Managing Charity Finances Through
Uncertain Times.
Some of the larger charities have seen a modest
decline in donations, yet smaller organisations
continue to maintain their existing income from their
loyal donor base.
Not surprisingly, organisations that relied on high interest
rates and dividends for income are finding themselves
with increasing cash pressures – but many are positive
about this turning around in 2010.
With the economic climate as it is, there is also a decline
in corporate giving. However, this may give rise to the
opportunity to boost volunteer numbers and provide
additional commercial support for charities which the
sector would welcome.
Government funding will have a major impact in 2010. The
sector anticipates a reduction in the amount available and
it is also thought that there will be a move from traditional
revenue funding to more project-specific based funding.
Charities must price projects accordingly and cover all
associated overhead costs to ensure that these projects do
not cause a drain on existing cash reserves.
Charities who are successful in attracting funding will
increasingly have to demonstrate their social impact i.e.
for every £1 of funding provided, how much value is given
back to the community – in short, what is their social
return on investment?
Challenges: Putting in place and acting on plans early
to counteract the anticipated shortfall in government
funding or annual income; seeking out new sources of
income, particularly where heavily dependent on just
one or a few streams; planning ahead whilst also
dealing with current challenges.
Opportunities: Forming working alliances and mergers
with other charities to potentially reduce costs and
ensure a sustainable future; an opportunity to review
services offered as well as fundraising programmes to
focus on the most productive activities; a good time for
reviewing and renegotiating contracts.
Karen Spears
Head of Charities,
Restructuring and Recovery
Watford
Tel: 01923 816400
Outlook 2010 11
Baker Tilly
Baker Tilly is a leading independent firm of accountants and business advisers that
specialises in providing an integrated range of services. We provide our growing and
established business clients with audit, accountancy, personal and corporate taxation, VAT,
management consultancy, corporate finance, IT advisory, restructuring and recovery and
forensic services. The firm has national coverage through its network of offices and is
represented internationally through its independent membership of Baker Tilly International.

Restructuring and Recovery key contacts:

National Head 020 7002 8600

Tracey Callaghan

Birmingham 0121 214 3100 London 020 7002 8600

Phillip Allen Simon Bower
Bob Bailey Geoff Carton-Kelly
Graham Bushby Peter Cooper
Guy Mander David Hudson
Alan Lovett
Bristol 0117 945 2000
Bruce Mackay
Andrew Sheridan
Peter Souster
Bury St Edmunds 01284 763311 Sarah Batchelor
Nigel Millar Matt Haw
Steve Merchant
Crawley 0845 057 0700 Tony Wright
John Ariel
Edinburgh 0131 659 8300 Manchester 0161 830 4000
Keith Anderson Lindsey Cooper
David Menzies Russell Cash
Don Bailey
Glasgow 0141 307 5000
David Menzies Milton Keynes 01908 687800
Guildford 01483 307000 Graham Bushby
Matthew Wild Newcastle 0191 255 7000
Mark Ranson
Hull 01482 607200
Alec Pillmoor Peterborough 01733 260780
Adrian Allen
Leeds 0113 285 5000
Adrian Allen Watford 01923 816400
Phil Pierce Mark Wilson
Mark Ranson Karen Spears

Forensic Services
Tony Chapman 0113 285 5000
Ross MacLaverty
Marcus McCaffrey 020 7002 8600

Offices also in:

Basingstoke, Brighton, Bromley, Chelmsford, Chester, Hereford, Lerwick, Liverpool, Saltaire,
Stoke on Trent, Tunbridge Wells and Warrington.

www.bakertilly.co.uk
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Tilly Restructuring and Recovery LLP and Baker Tilly Tax and Accounting Limited are not authorised under authorised and regulated
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