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— Bankruptcy —
Cheering on, sotto voce, are a battalion of bankruptcy advisers. For them, business is very good indeed. KPMG LLP forecasts a 50% surge in U.K. corporate insolvencies this year, up to 5,000. "This recession has come upon us with great speed. We're extremely busy and expect to be so for the rest of the year," says Richard Fleming, U.K. head of restructuring at KPMG.
But even as business is booming, insolvency advisers are fighting hard for market share. While the Big Four accounting firms -- Deloitte & Touche LLP, Ernst & Young LLP, KPMG, PricewaterhouseCoopers LLP -- dominate the sector as they have for decades, they face growing pressure from nimble rivals like Begbies Traynor Group plc and Zolfo Cooper. Some of these lower-profile firms may offer reduced fees as creditor committees are ever more cost-conscious. Others are spending money to recruit big name industry veterans who could help bring in new clients. Says Robin Knight, a London based partner at Zolfo Cooper, "We are competing directly with the Big Four." The fees can be substantial. Sources report that administrators can earn anywhere between £3 million and £50 million ($4.3 million and $72 million) for a large insolvency. PricewaterhouseCoopers revealed late last year that it is earning £4 million a week for its role as administrator of Lehman Brothers Inc.'s European division. It deploys some 300 people on a complex job that, in one form or another, is likely to continue for years. Financial services cases can be especially prolonged: PwC is still working on the Orion Insurance Co. plc case nearly 15 years after it went into liquidation. Dan Schwarzmann, London-based head of Business Recovery Services at PwC, cautions that "fees can start off at a high level, but tail off quickly -- perhaps after six months. Overall, on the cases I am involved in, they are lower than generally charged in the corporate finance sector as a percentage of the assets. Fees have to be approved by the creditors' committee and we work very closely with them." Administrators usually charge by the hour, with partners at the big firms earning anywhere between £400 and £600 an hour. Even senior managers are hired out at £300 to £400 an hour, while support staff can cost more than £100 an hour. Recruiting professionals to bring in these fees, however, is far from straightforward since there are only 1,700 licensed insolvency practitioners in the country. Even many of these are not practicing. As Ric Traynor, executive chairman of Manchester-based Begbies Traynor, says, "It's a small profession at the best of times and over the last 15 years many people have moved out of it. We are, however, increasing capacity by hiring and we now have around 400 professionals." This figure could grow to about 500, he added. Zolfo Cooper, which employs around 200 professionals in the U.K., is aggressively recruiting. "We're expanding by about 25% to 30% to cope with the increasing volume of work," Knight says. At the Big Four, partners often move staffers from other departments into insolvency and restructuring work. Says Lee Manning, a partner in reorganization services at Deloitte & Touche, "We are very busy and as a result we've moved about 60 people across internally from corporate finance." Whatever their hiring plans, all firms are keen to emphasize that
they have the capacity to cope with a growing workload. Says
Schwarzmann, head of a team of 900 at PricewaterhouseCoopers, "We're
not in the market recruiting because we maintained our business
recovery and insolvency expertise when the economy was buoyant by using
(professionals') skills in areas which needed assistance, such as
health, pensions and insurance. We already have the largest
restructuring and insolvency business in the country and we're coping
with the resources we've got." He points out that only a minority of
PwC's Lehman team comes from his department and that less than 5% of
his partners Such is the volume of work facing insolvency advisers that, says Zolfo Cooper's Knight, "We're moving towards a period now where there could be a surplus of work for the profession. Although the biggest jobs usually involve a pitch of some kind, at least 50% to 60% of our mandates do not." Most high-profile mandates go to one of the Big Four. Filings by insurer Erinaceous Group plc went to KPMG; Woolworths Group plc was handled by Deloitte; music retailer Zavvi Ltd. went to Ernst & Young. But less well-known advisers BDO Stoy Hayward LLP (Dawnay Day International Ltd.), Zolfo Cooper (Wagon plc) and Begbies Traynor (Carlyle Capital Corp. Ltd.) have taken on some major administrations. Ric Traynor of Begbies says that generally, where a company's debt is more than £20 million, the banks will prefer to appoint one of the Big Four unless conflicts of interests rule them out. "This will happen increasingly as the resources of the big firms are stretched and as the banks become more aware of costs," he says. "Our fees are highly competitive. We are well positioned for taking on both U.K. mandates and mandates with an international aspect." The Big Four acknowledge the threat. "We're not complacent about the competition, which isn't just limited to the other Big Three," says Schwarzmann. Fleming says that, while the Big Four have a commanding presence at the top end, his smaller rivals have been busy: "We're all very active now and some of the second tier firms work on higher numbers of small administrations than the Big Four." There are no independently compiled league tables for U.K. insolvency work, but numbers assembled by Begbies Traynor on the basis of announcements in the London Gazette, a government publication, show that Zolfo Cooper in particular is making headway among the leading international firms. It acted on some 104 administrations in 2008, compared with KPMG's 168 and PwC's 141. Begbies took on 306 appointments, while Tenon Group plc acted on 207, BDO Stoy Hayward 177 and Grant Thornton LLP 102. This year, as the recession deepens and insolvency advisers find their services in greater demand, the fight for market share will grow more intense. |
The U.K. will suffer the most severe recession in the developed world, the International Monetary Fund recently projected.
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