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Banks, Lenders & Investors Finance Insolvency Turnaround

Q2 insolvencies offer no sign of economic storms easing

rising insolvencies indicate continued stormy ecoomic weatherThere are no signs of the pressures on businesses easing off as insolvencies in the second quarter of 2019 (April to June) continued to climb, according to the latest figures released by the Insolvency Service.
While the number of compulsory insolvencies fell, there was a significant increase in the number of CVLs (Company Voluntary Liquidations), which showed a 6.9% increase, an increase of 2.6% in the total numbers of insolvencies compared to the first quarter of the year.
Compared to the same quarter in 2018 the numbers of insolvencies have risen by 11.9%, the highest underlying rate of insolvencies since 2014 according to the Insolvency Service.
It reports that those businesses that have fared worst in the second quarter have been “the accommodation and food service industry with 74 extra cases compared to the 12 months ending Q1 2019 (an increase of 3.4%) and the construction industry with 37 additional insolvencies (a 1.2% increase)”.
The latest Red Flag Alert for the second quarter of 2019 from Begbies Traynor also emphasises an increase in businesses in “significant distress”, to 14% of all UK businesses while the average debt of insolvent companies has more than doubled – from £29,873 in 2016 to £66,226, it says.
Set this against a backdrop of a weakening global economy, as reported by the World Bank in June, in part thanks to business uncertainty because of international trade tensions.
In the UK context, the future for the economy remains completely unknown given the new Prime Minister’s Brexit strategy. This is evident from the factory output figures for July that reported the lowest levels for six years, slowing consumer borrowing, and this week the value of the £Sterling dropping to its lowest level for two years.
While low exchange rates may be a positive for UK businesses involved in exporting, making exported goods and services cheaper, they will also add to business costs on any supplies and materials imported from outside the country where the net result is that we are worse off given the UK trade deficit which was £30.8 billion in the 12 months to April 2018.  Another factor is consumers who are continuing to spend but may prefer to stay at home instead of having more expensive holidays abroad.
Given also the ominous noises about continued UK-based car manufacture, most recently from Ellesmere Port, depending on the post Brexit conditions here, not to mention the continued carnage in High Street retail, more people will also be worrying about their future job security.
It would be great to be able to say that the end is in sight but sadly, with so many “known unknowns” the economic weather outlook has to remain stormy.

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Finance Insolvency Turnaround

UK business insolvencies and distress indicators continue to rise

UK business in stormy watersAn alarming number of businesses are in either significant or critical financial distress, according to the latest Begbies Traynor Red Flag Alert, issued just the day before the Insolvency Service revealed the figures for Q1 (January to March) 2019.
484,000 UK firms, or 14%, are in “significant financial distress” while the numbers of those in “critical financial distress” have risen by 17% in Q1.
Begbies Traynor partner Julie Palmer said: “Many UK businesses are currently in limbo and deferring major investment decisions. This combined with consumers holding back on big ticket purchases has resulted in increasing significant distress across many sectors.
“Capital intensive sectors – such as construction and property – are suffering as both business and consumers have taken a cautious approach and limited their exposure.”
These figures would seem to be borne out by the Q1 Insolvency statistics, which showed a continuing upward trend, primarily in CVLs (Company Voluntary Liquidations) and CVAs (Creditors Voluntary Arrangements). Administrations, too, had reached their highest quarterly level since the same quarter in 2014.
CVLs increased by 6.2% compared to Q4 2018, administrations were up 21.8%. and CVAs increased by 43.1%.
Top of the list, as they have been for some time, were the wholesale and retail trade’s repair of vehicles industry sector, which saw the largest increase in underlying insolvencies, with 67 extra cases compared to the 12 months ending in December 2018. This was closely followed by the administrative and support services sector. Next highest were Manufacturing and accommodation and food services.
However, it is possible that the pressure to meet rent and rates, and the continued struggles of High Street retailing account for some of the significant rise in CVAS in the first quarter of 2019 when compared to the last three months of 2018.

No end in sight to the pressures facing UK business

While it would be easy to blame the continued uncertainty over Brexit, Begbies Traynor executive chairman, Ric Traynor, said although this was “the main driver” there were other factors involved, including the combination of faltering European economies and a potential trade war between the US and Europe.
To this list I would add the decline in trade with China which is down to these same factors combined with last year’s slowing growth there.
With the economy being predicted to flatline for the rest of the year and investment sluggish, it seems that UK businesses are facing a perfect storm in their struggle to survive and grow.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance General Insolvency

Do the Q1 insolvency figures suggest Brexit chickens coming home to roost?

Brexit chickensYet again, as in the last quarter of 2017, construction and retail were the top two sectors in the insolvency statistics for January to March 2018.
The first three months of 2018 were at their highest quarterly level since the same quarter in 2014, with a total of 4,462 companies entering insolvency, 3209 of them via Creditors’ Voluntary Liquidations (CVLs) accounting for 72% of all the quarter’s insolvencies.
Total insolvencies also represented a 26.2% increase on the same quarter in 2017 and an increase of 13% on the pre-Christmas October to December quarter.
Regardless of the excuses of the usual post-Christmas slump, and this year, the effects of the three-week weather event known as “Beast from the East”, it seems clear now that insolvency numbers are heading inexorably upwards as they were throughout 2017.
Equally clear, given the vast numbers of CVLs as a proportion of the total, it seems that company directors are no more optimistic about the future and are continuing to throw in the towel.

So, was “project fear” actually “project reality”?

In the aftermath of the June 2016 majority vote in the referendum to leave the EU, much scorn was heaped on the alleged scaremongering tactics of the Treasury and the then Chancellor of the Exchequer George Osborne for their warnings about the negative effects of Brexit on the UK economy.
While those supporting leaving the EU remain upbeat, the evidence is mounting that all is not well.
Consider the evidence.  Despite the improvements in global growth in the last two years the UK has dropped from being one of the top seven performers to the bottom and last week the ONS (Office for National Statistics) reported that UK growth for January to March had dropped to 0.1% from 0.4% in the previous three months.
The CBI interpreted this as the start of a prolonged economic slowdown and its survey of manufacturers, services and distribution companies led it to predict a near-standstill situation for the next three months.
In a pessimistic comment piece in Sunday’s Observer, the writer Will Hutton was of the opinion that the UK economy was heading for imminent recession, citing as examples the slumps in mortgage approvals (by 21%) and car manufacturing (by 13% for the domestic market and by 12% for export). These are significant examples given that the UK economy depends heavily on consumer spending and confidence, both of which have been in short supply for some time now.
While the pro-Brexit camp remain relentlessly upbeat about the UK’s economic future despite the continued opacity of the negotiation process and the goals, is it time to concede that the fears of those in favour of remaining in the EU are being realised and the Brexit chickens are coming home to roost?

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Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency Rescue, Restructuring & Recovery

What next for business insolvencies in 2017

solvent or insolventCompany insolvencies for the whole of 2016 rose slightly, subject to a caveat from the Insolvency Service.
The latest results, published on Friday, 27th January, showed an annual increase of 12.6% on the year before, but the service said that this was “due to 1,796 connected personal service companies (PSCs) entering creditors’ voluntary liquidation (CVL) in Q4 following changes to claimable expense rules.”
Excluding these actually meant that insolvencies for 2016 had risen by 0.3% compared to 2015. The rise was driven by a rise of 1.1% in CVLs and a 0.7% rise in compulsory liquidations. All other types of insolvencies fell.

What was the problem with payment via PSCs?

It was estimated that the Government was losing around £400m of tax revenue because of the PSC set-up governing expense rules for freelancers and contractors.
The regulations were changed in the Spring 2016 Budget to eliminate a loophole in the HMRC IR35 provisions that enabled such workers to take their payments as dividends and a minimum wage from specially set up personal service companies thus enabling them to minimise their tax payments.
It was a system widely used by everyone from entertainers, IT contractors and public sector employees.  The government argued that they were not contractors at all but “disguised employees”.
The most vulnerable sectors in the UK economy and the outlook for 2017
Sector breakdowns for insolvencies published by the Insolvency Service lag behind by one quarter so the most recently available information is up to the end of Q3, September 2016.
In the 12 months to the end of Q3 2016 the construction sector suffered the highest number of new insolvencies, although the figure was down slightly at 0.05% on the 12 months ending in Q2 (June 2016). Next highest was wholesale and retail trade & repair of motor vehicles and motorcycles sector.
These, together with administrative and support service activities, accommodation and food service activities and manufacturing remain the most vulnerable sectors of the UK economy.
This week, business recovery practice, Begbies Traynor’s latest Red Flag research revealed that more than 275,000 companies were showing signs of “significant” financial distress at the end of last year.  In the final quarter of 2016 it found 276,518 businesses were experiencing ‘significant’ financial distress – that’s up 3% compared with the same time in 2015 and of these 91% were SMEs, almost a quarter of them in London.
There are signs that the volatility of £sterling and its effects on import prices for food, oil and raw materials are already stoking up inflation with no likelihood of any reduction in pressure on prices while Brexit uncertainty is ongoing and the likelihood is that there will continue to be an increase in insolvencies in throughout 2017.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency Rescue, Restructuring & Recovery Turnaround

Insolvencies continued to fall in the three months up to the EU referendum

insolvency graphPerhaps because of the feverish media coverage before and after the UK EU referendum vote, there has been little if any comment on the continued reduction in company insolvencies.
The most recent figures, published at the end of July for April to June 2016 (Q2) showed a continuation of the downward trend that has been in evidence since their peak in 2009 in the aftermath of the 2008 Great Recession.
An estimated total of 3,617 companies entered insolvency in the last quarter, down 4.2% on the first three months of 2016 and down 2.7% on Q2 in 2015.
By far the biggest driving force remained Creditors’ Voluntary Liquidations, showing a slight rise, by 0.7% on the same period in 2015, and suggesting that creditors are unwilling, or unable, to wait for their money or to enter into arrangements for repayments over a longer period since the use of Company Voluntary Arrangements (CVAs) remains at rock bottom.

Construction Industry struggles

The Insolvency Service has as yet produced no figures for insolvencies by industry sector, but Construction was by far the worst hit from January to March (Q1) 2016.
However, the monthly Markit/PMI statistics are a good indication of the ongoing state of the Construction industry, showing a consistent contraction in both confidence and activity throughout the last six months.
Indeed, after two quarters of contraction the industry is in recession and the post-Brexit July figures gave no relief to the gloom, producing the worst set of monthly figures for seven years.
Given the uncertainty since the referendum, plus the erosion of profit margins due to increased materials costs and a skills shortage in the sector optimism about the health of Construction is not likely to return any time soon.
Certainly there is little prospect of much in the way of commercial construction while the future of the UK economy is in limbo.
It remains to be seen what the Government proposes to do about the acknowledged acute shortage of affordable homes that has been causing such problems (while at the same time pushing up property values). If there is some relaxation of the current restrictions on Housing Associations for new building of social housing there might be at least some relief for Construction.

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Banks, Lenders & Investors Business Development & Marketing Cash Flow & Forecasting Finance General Insolvency Rescue, Restructuring & Recovery Turnaround

Has 2008 changed the pattern of insolvencies increasing on an upturn?

An increase in insolvencies used to be a reliable signal that the economy was coming out of recession.
Six years after the Great Recession in 2008 we are being told that our economies are growing, the recession is over, SMEs are reporting increasing orders yet there is still no sign of an increase in insolvencies.

So what is going on?

The reason that insolvencies rise in an upturn is because two things happen.
Firstly companies start to get an increase in orders, but unless they manage their cash flow carefully, or have adequate reserves of capital they risk overtrading – essentially not being able to fund the growth.
Secondly, secured creditors generally only call in loans when they think there is a fair chance of recovering their money, therefore during an upturn and in particular when the secured assets increase in value.
The consequence is that when creditors start to demand their money back and a company is overtrading it can’t realistically pay off the loan – the result is insolvency.
So in our view, the recession is not yet over, markets remain jittery, confidence is still uncertain and asset values are falling, hence fewer insolvencies.
Have we simply papered over the cracks?

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Banks, Lenders & Investors Cash Flow & Forecasting General Insolvency Rescue, Restructuring & Recovery

Business pain in a recovering economy

There are two things happening that suggest that signs of economic recovery are believable, rather than government spin.
The first is the narrowing of the trade gap with a significant growth in exports in June and the second is a 10% rise in business insolvencies (compulsory and creditors’ voluntary insolvencies) in the quarter from April to June 2013 (3,978) compared with January to March (3,601).  However, there were actually slightly fewer insolvencies this year when compared with the same quarter in 2012.
Insolvencies generally do increase when an economy is coming out of recession because creditors normally start to lose patience and begin recovering debt when they can see signs of a rising market.
This time, however, I believe something else is going on.
Firstly, for more than two years now businesses have been focusing on paying down debt so why should creditors suddenly lose patience? Secondly, it may be that HMRC is taking a tougher line on collection of arrears now.
But most importantly now that the owners and directors of businesses can see the future more clearly, and there is greater optimism around, they are starting to restructure their businesses because clearly any future growth is not going to be fuelled by business lending.
It is perhaps no bad thing that growth is likely to be slow and steady and will be achieved by businesses ensuring they have enough working capital, by imposing tough payment terms on customers and suppliers and by everyone in the supply chain working together.
The worrying thing is that in other circles there is still too much reliance on a consumer-led recovery and that exports to non-EU countries were lower, playing no part in the narrowing of the trade gap.

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Banks, Lenders & Investors Business Development & Marketing General Insolvency Rescue, Restructuring & Recovery Turnaround

One – or two – swallows do not make a summer

Following on from the demise of Jessups the camera retailers the news that HMV had finally called in the administrators comes as no surprise.
What is perhaps more surprising is that a couple of commentators have seized on this development as perhaps an early sign that banks are feeling more confident about surviving losses and that better times are on the way in 2013 on the grounds that there is usually a rise in insolvencies as an economy starts to recover.
The more realistic view, K2 would say, is that insolvencies are still at a very low level and it is way too early for anyone to be so optimistic.
More likely, and there has been plenty of evidence in the cases of Comet, Jessup’s and HMV, is that their business models have been found wanting in the new world of consumer caution, shopping around for the best prices and the move to online shopping.
With a raft of year-end reports due out this week, including Mothercare, Home Retail Group (Argos and Homebase), Bookers, and Asos the picture will gradually become clearer.  One to watch is Mothercare, which did alter its business model last year to focus more on out of town retail stores rather than the High Street. This measure does seem rather late, being at least 10 years after others took the same initiative. The question will be whether Mothercare has done enough to survive without further and more dramatic restructuring.
While the pain is most obvious on the High Street, reduced consumption, changing consumer behaviour and inappropriate business models apply to many businesses that have not yet gone bust. There is no sign yet of a lift in bank confidence as they continue to prop up zombie companies rather than lending to companies wanting to change their business model or new ones with a vision and growth potential.
For the foreseeable future, businesses would be wise to examine their business models and if necessary to implement change early rather than put it off as restructuring becomes more difficult the longer it is left.  This is still no market for dramatic moves to improve turnover.

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General Rescue, Restructuring & Recovery Turnaround

K2 believes the budget is positive for business and for those in difficulties

With the latest inflation figure showing an increase to 4.4% and a lower amount of tax collected in February, both announced the day before the budget was due, arguably the Chancellor had little room for manoeuvre.
There were some small comforts for smaller enterprises though the bulk of George Osborne’s measures are likely to benefit big corporations the most.
Cutting fuel duty by 1p per litre, and delaying a planned 4p per litre rise to April 2012 along with scrapping the fuel duty escalator was welcome particularly to hauliers, couriers and other companies that depend heavily on transport.
Keeping personal tax at its current level and increasing the personal tax allowance next year will also moderate any pressure on wage inflation, which is in any case not great given the current uncertainty over employment.
The money for apprenticeships, the new enterprise zones, the relaxation of planning laws and the new decision deadline should also make life easier for businesses.
However, I believe most of the budget’s measures are likely to benefit larger corporations, rather than the smaller, UK-focused businesses.
Overall this is a budget that doesn’t load yet more pressure on struggling businesses but the real concern among businesses is the prospect on interest rate rises which will squeeze those who are struggling to survive and precipitate a significant increase in the number of formal insolvencies.