Automotive Sector Experience

Our Automotive Sector Experience

As a globally connected industry, the automotive industry was one of the first sectors to suffer significant disruption as the COVID-19 pandemic took hold. The subsequent fallout has hit every part of the automotive industry from those involved in the design, development, and manufacturing of vehicles, through to the dealerships who sell the finished product to the public. For those working in vehicle manufacturing plants and car forecourts, as well as the numerous companies who form part of the interconnected supply chain, 2020 has presented challenges like never before.

Supply chains were interrupted as parts manufacturers in China were ordered to cease operations, limiting production capacity, and hindering exports. This disruption has continued as the virus spread around the world, forcing manufacturing in plants across Europe, and indeed the world, to be halted. 

While factories have reopened, the need for enhanced PPE and increased social distancing to protect the safety of employees, has seen production rates slow, and output fall.

Away from manufacturing and supply chain issues, dealerships have also seen the demand for vehicles take a sharp decline as consumers re-assess their need for a vehicle, in particular their need for an upgrade.

Falling demand coupled with general fears around a potential recession, or an otherwise protracted economic downturn, has created a perfect storm of dampened consumer confidence which could take some time to turn around.

So what can you do if your automotive company is experiencing financial distress as a result of the COVID-19 pandemic, and how can you begin to turn the situation around?

The good news is that there are a range of business rescue and recovery strategies which can be explored, particularly if the company appears to be viable over the long-term.

For businesses which were performing well prior to the pandemic, the current challenges do not necessarily mean that this is the end for the business. Instead, the company may need to undergo a process of restructuring – whether operational, financial, or a combination of both – in order to get back on track.

Supply chain disruption may take a while to recover to pre-COVID stability, meaning those within the industry need to have a solid, robust, yet flexible plan for the short- and medium-term. Manufacturing capacity may have to be streamlined to preserve both funds and resources, as well as a consideration given as to whether your organization needs to exit unprofitable markets to preserve cash reserves during this time.

Formal negotiations through a CVA

If your company has found itself operating on increasingly reduced income and you are at risk of defaulting on covenants, or other financial arrangements, it is imperative you liaise with the bank in order to find a way forward.

Entering into negotiations with your creditors can help stabilise your company in the short term, while waiting for revenues to increase. This type of negotiation could be aimed at one creditor in particular – such as a bank, HMRC, or a supplier – or alternatively, you could propose a repayment plan with a number of creditors at one time by way of a legally-binding repayment plan known as a Company Voluntary Arrangement (CVA).

CVAs are a formal insolvency measure which can only be entered into under the supervision of a licensed insolvency practitioner. A typical CVA will run over 3-5 years and allow for a financially distressed company to pay back its outstanding debts at a rate which is financially sustainable.

A proposal will be drawn up which takes into account the company’s debt level as well as its ability to repay, which creditors will then be invited to vote on; at least 75% (by value) of the company’s creditors must give their agreement in order for the CVA to be implemented.

An accelerated version of this process known as a Fast-Track CVA, aims to achieve the same result for both company and creditors alike, but with less intervention needed by the insolvency practitioner. This not only speeds up the process, but also considerably cuts down the professional fees incurred over the duration of the agreement.

Capital injection and capital refinancing

If the business is generally performing well, an injection of capital to top up its working cash reserves, or alternatively exploring refinancing options, may be required.

Refinancing existing company borrowing can be a challenge at the best of times, but particularly in the current climate. Some lenders have lessened their appetite for risk during this period of economic uncertainty, while others are prioritising those applying for the government-back loan schemes.

If business performance has recently fallen, it may be more challenging to demonstrate to lenders the ability to service liabilities, particularly if it fallen behind projected forecasts. Enlisting the help of a commercial finance expert, can ensure the case for refinancing is presented in the most appealing light, while addressing the issues the business has faced during the COVID-19 pandemic.

For many within the automotive industry, the financial impact of COVID-19 will still be being felt long after the health risks posed by the virus have passed, however, taking the appropriate steps now can ensure your company is in the best position possible for future success and growth as the economic climate improves.

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Insolvency Practitioners Association Institute of Chartered Accountants in England and Wales R3: Association of Business Recovery Professionals ICAEW Business Advice Service Turnaround Management Association ICAS | The Institute of Chartered Accountants of Scotland

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