R3 Scotland Forum: The Route to Recovery for the Hospitality & Leisure Sector

At the recent R3 Scotland Forum[1], experts in the hospitality and leisure sector came together with the restructuring and insolvency profession to discuss the issues the sector is facing as the country emerges from lockdown. The panel discussion which was chaired by Judith Howson, Senior Manager at French Duncan and member of the R3 Scotland Committee was led by Steven Fyfe, head of the Scotland Hotels Divisions within Savills. He was joined by Stephen Montgomery, spokesperson for the Scottish Hospitality Group; Mike Glancy, Managing Director of Bar Restaurant Solutions and Jamie Nellany, Senior Associate in the Restructuring and Insolvency team at Brodies.

The panellists discussed the challenges in the sector and some possible solutions, including the role that the restructuring and insolvency profession can play in navigating the route to recovery. Here are the key themes that emerged:

The Sector is facing a Perfect Storm – The impact of the COVID crisis and Brexit have both disproportionately affected the sector and have accelerated issues that it was already facing. Stephen M commented "since June 2020, the share of businesses in the sector reporting lower turnover than usual has been around 60% and peaked in November 2020 at around 90%. Comparing this to the cross-sector average of 45% highlights that the sector has been disproportionately affected."

The panellists discussed the factors weighing on the sector. Steven F set the scene by detailing the stark reduction in overseas visitors to the UK – down 76% from 2019 to 2020. Stephen M explained the Scottish Government's grant funding scheme and the need for the industry trade bodies to come together and lobby for a fairer system. As restrictions begin to be lifted, the industry is facing increased costs for complying with social distancing, lost revenue due to cancelled bookings, a recruitment crisis and a mounting debt burden. Stephen M commented that "we're emerging from one pandemic into another of debt, recruitment and mental health."

The sector is at a turning point where it is trying to get back to normal trading practices and at the same time, liabilities, including an increase in VAT rates, deferred rent payments and new debts such as CBILs and bounce back loans are becoming due for payment. Mike explained that pre-pandemic, many businesses in the sector traded happily on narrow profit margins but are now trading at a loss.

Steven F commented that it's not all doom and gloom for the sector: "The UK has the highest score in the Tourism Economics' Domestic Opportunity Index which is based on the ratio of outbound travellers to domestic." In other words, there is a big opportunity for the sector to capitalise on the reduced numbers of people that will be travelling abroad, at least in the short to medium term.

Dealing with Debt – A lot of hospitality businesses have had no choice but to take on additional debt just to survive. In addition, they may have deferred other liabilities such as VAT and rent payments and have benefitted from the furlough scheme which is scheduled to tail off. The panel discussed how the sector might deal with these mounting burdens.

Stephen M explained the affordability of repayments is a big issue at the moment because a lot of businesses are operating at a much-reduced capacity and even as restrictions ease further, it could take a long time before turnover is back to pre-pandemic levels.

Jamie made the point that it's important for businesses to have early conversations with their creditors, whether that is banks or HMRC, to discuss what is affordable in the hope that a repayment plan that works for all can be agreed. We have heard in other sessions during the Forum that businesses that get on the front foot are more likely to receive sympathetic treatment from creditors and the restructuring profession can help facilitate these discussions.

Stephen M highlighted the pressure that operators are under and that many will not want to talk to HMRC due to the negative connotations. A theme of the discussion and the Forum generally was that we're in a period of re-calibration and change. Hopefully all stakeholders involved in the sector will work together to find solutions aimed at recovery and some of these negative connotations will begin to be eroded.

Recruitment – The recruitment issues the sector is facing have been well documented. The pandemic coupled with Brexit has resulted in huge numbers of workers leaving the industry. National lockdowns are also thought to be responsible for an increased desire in people for a better work-life balance and with the industry being associated with long and anti-social hours, this is an added problem.

Mike described the staffing issues as a crisis with little prospect of improvement over the next 12 months. Some operators with multiple units are only able to open at 50% capacity due to lack of staff and the scarcity of people for certain positions such as chefs is driving up labour costs. Steven F commented that he has heard stories of operators reporting workers being poached by competitors direct from their venues.

Stephen M thinks the solution lies in changing the message around a career in the sector: "We need to get away from being thought of as the last resort profession or a student job…We need to promote the sector as a great place to work…like the British Army adverts, we should promote that people will learn a skill by joining the sector." Stephen went on to say that it's time the industry looked at its fair work policies, to consider work-life balance and to listen to employees on what makes their job worth coming to.

Restructuring Options – Given the issues impacting the sector, some businesses will be facing insolvency or require to be restructured. Jamie asked the other panel members what the restructuring and insolvency profession can do to best help the sector recover.

Mike explained that he can see benefit in bringing together sector experts and IP skillsets within the CVA process to achieve a restructure. As part of the process, an operational review could be carried out to identify inefficiencies and drive the changes necessary for the business to trade out of its difficulties. If creditors can see that fundamental operational changes are being made then they are likely to be more engaged in the process. Mike asked the IP community attending the Forum if they would be willing to consider partnering on this basis.

Mike and Jamie discussed that numbers of CVAs in Scotland have historically been very low and there isn't an obvious reason why. The COVID-19 pandemic has created anomalous circumstances - otherwise profitable businesses that had no choice but to take on debts just to survive. Jamie made an appeal to the profession to think outside the box: "if the profession doesn't recalibrate and reconsider the use of CVAs, their take up will remain low, it starts with us".

R3 have recently produced standard form COVID-19 CVA documents aimed at restructuring businesses impacted by the pandemic. This is a useful starting point which should help CVAs be more accessible to the SME market in Scotland.

Jamie also discussed the new procedures introduced by the Corporate Insolvency and Governance Act 2020 ("CIGA") and whether they might provide options for businesses in the hospitality sector in Scotland. He made the point that restructuring plans as they are currently structured are not SME friendly but they shouldn't simply be written off. The ability to force creditors to accept a restructure could be useful for SMEs but there is a lot of work to be done to streamline the process. The new moratorium procedure should be considered as a tool to create breathing space to formulate a restructuring strategy which could involve a refinance, a sale of business or assets or a CVA.

In summary, the hospitality and leisure sector is facing a perfect storm of issues as it emerges from lockdown. As Stephen M commented, we're entering a new pandemic of debt, recruitment and mental health. The sector is hugely important for Scotland's economy and its identity and so the appeal from the panellists is that all stakeholders, from the Government, lenders, HMRC and the restructuring and insolvency profession should work together to find solutions to help the sector recover.

[1] R3 is the trade association for the UK's insolvency and restructuring professionals. The Scottish Forum was a virtual conference event run by the Scottish division of R3.