BrazilAntonio Alvarez III: 'Banks and investors are tightening the reins'
With dark clouds gathering over the economy, banks and investors are tightening the reins. According to Antonio Alvarez III – the European boss of Alvarez & Marsal – the coming period will see increasing scrutiny on companies that risk falling into financial distress.
Having spent close to a decade strengthening their books, many banks went into the Covid-19 pandemic in a well-fortified position. This was something which experts argued positioned them well to help drive the recovery, following the roll-back of lockdown measures.
With a global downturn now looming, however, the European leader of one of the world’s leading restructuring consultancies believes that may be too simplistic a picture.
In conversation with financial newspaper FD (the Dutch equivalent of FT), Alvarez III – Managing Director and European Practice Leader of Alvarez & Marsal – stated that banks face a mounting risk of bad enterprise loans, with “unforeseen surprises” set to unfold in the coming quarters, particularly when it comes to energy-intensive concerns.
“Banks have little insight in where they actually stand,” Alvarez III noted. “Many companies are in more serious financial trouble than their banks are aware of. And covenants are much broader than before, so banks only notice much later that companies need funds.”
Earlier in the autumn, a report from KPMG among 1,300 CEOs worldwide found that 87% of them believed that the global economy will fall into recession within the next year. Even though a mild and short recession is expected, this is seeing the market become much more cautious – exacerbating the situation.
In Alvarez & Marsal’s work with executives, Alvarez III has noticed that banks are responding to economic headwinds by de-risking decisions in their credit departments. According to Alvarez III, this means that companies already in the trouble zone will struggle to finance their way out of financial hardship.
While “companies have recently built up a lot of cash reserves and agreed extensive credit facilities with their banks” and “consumers have built up enough savings”, inflation means these may run low quickly – and without being able to borrow easily, many companies may well struggle, something Alvarez III expects to “really shift this winter”.
Investors, such as private equity groups, are similarly changing their behaviour. Some are simply more cautious in their investments, others are looking at ways of restructuring. “Private equity players are always inclined to act quickly when things go wrong,” said Alvarez III.
One reason investors may be so trigger-happy at present, is the amount of investment they have been pumping into firms in the last 12 months. Anticipating a post-pandemic boom, many committed to hefty purchases, making 2021 a record year for private equity and venture capital. With patience swiftly wearing thin, many are now considering ways of securing the value of their investments at any cost. That may be a hasty, and wasteful decision, however.
Alvarez & Marsal is chiefly known as a specialist in restructuring services. The firm gained global fame when it was appointed the lead advisor to the resolution of investment bank Lehman Brothers (its downfall triggered the 2008 global financial crisis).
But Alvarez & Marsal – which employs more than 6,000 consultants and staff – does a lot more than restructuring. The US-headquartered consultancy also supports clients with mergers and acquisitions (especially financial due diligence), performance improvement, forensics, disputes and litigation, and finance and risk management.
