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

The latest insolvency statistics for the first quarter of 2020 don’t tell the whole story

insolvency statistics not the whole storyAstonishingly given the news coverage of a financial fallout due to the Coronavirus pandemic, the latest insolvency statistics for Q1 January to March 2020, show a decrease both when compared to the previous quarter and to the same quarter in 2019.
The figures, published by the Insolvency Service yesterday, showed a total of 3,883 company insolvencies with the majority again being in CVLs (Company Voluntary Liquidations).
This was a decrease of 10% compared with the last quarter of 2019, October to December, and of 6% when compared to January to March quarter of 2019.
Construction continued to have the highest number of insolvencies, followed by the wholesale and retail trade and accommodation and food services.
While these insolvency statistics cover the period before the lockdown due to the Coronavirus pandemic was imposed a drop in insolvencies is still surprising given that economies in the UK and EU had been slowing in previous months.
There is more clarity, however, from the latest Begbies Traynor Red Flag alert figures published on April 17.
They reported their highest-ever numbers of businesses in significant distress at 509,000 with the impact of the lockdown showing 15,000 more businesses in significant distress (3%) compared with Q4 2019. The vast majority of these, they found, were SMEs with under 250 employees.
There is even more concern in the Red Flag figures for businesses in critical distress, which Begbies Traynor regards as a precursor to falling into insolvency. They reported a 10% increase in the last quarter alone, although, as they note, “creditors have been held back from taking court action due to the lockdown”.
The most notable increases, they report, are a 37% increase in bars and restaurants, 21% increase in real estate and property, 11% increase in construction and 8% increase in both general retail and manufacturing.
All this is despite the various financial support measures of grants and loans announced by the Chancellor who has sought to help businesses survive the pandemic.
Having said that, loans need to be repaid and many are concerned about the future prospects for businesses and for some industries that may take some time before they return to normal, not least the Banks who understandably might be reluctant to lend to those who are unlikely to repay their loan. This might explain the numbers of businesses that have been turned down.
In the middle of an unprecedented situation like the current pandemic it is difficult to draw conclusions from trends or make meaningful assumptions about the future number of insolvencies but there is no doubt they will rise significantly.
Historically the rise has been an indicator of the country coming out of a recession although most recessions have been ‘V’ shaped where some are predicting a ‘U’ or even an ‘L’.
Clearly much will depend on for how long the lockdown continues and we should prepare for many companies, particularly those relying on travel, events, hospitality and an already-struggling High Street, to disappear altogether as Warehouse and Oasis have most recently done.
Much will also depend on consumer confidence and spending power – and how many people have lost their jobs but clearly economic and business recovery will be prolonged and painful.
 

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Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Current post Brexit insolvency statistics are no guide to the future

solvent or insolventThe latest corporate insolvency statistics released by the Insolvency Service for Q3 (July to September) show 3,201 liquidations slightly increasing by 2.2% from the previous quarter while 75 CVAs show a significant decline by 30.6% from Q2. The number of liquidations is broadly at the lowest level over the last 30 years since the previous peaks of 5,110 liquidations in Q1 of 2009 and 6,332 in Q1 of 1992.
Despite the above statistics which might suggest businesses are doing well, research carried out in mid-October by Pinsent Masons among Insolvency Practitioners (IPs) and published in Insolvency Today found that two thirds of the insolvency profession believe Brexit will contribute to an increase in the number of business failures in the UK over the next 12 months.

Uncertainty about the future is not the only pressure looming over businesses.

Arguably, loose monetary policy and low interest rates maintained by the Bank of England post the 2008 Great Recession may have preserved the life of many zombie companies. But given the increase in inflation revealed last month, and the forecasts of more to come, it may be that there will be no further room for interest rate reductions. Indeed, interest rates look likely to start rising, which might benefit savers but not businesses. Indeed, rising inflation combined with declining profits that many businesses are reporting raise the spectre of stagflation. Insolvencies can’t be far behind.

What other factors may affect business insolvencies?

Recent criticism of Mark Carney, the Governor of the Bank of England, by some members of the Government has led to concern about their relationship which leads to further uncertainty. While the Governor has announced that he will stay on for an extra year beyond his 2018 term it isn’t the full three years option that would have reassured the money markets.
Business confidence is key for the economy since it is a prerequisite for medium and long term investment. Investment in turn improves productivity which in turn justifies higher wages which leads to a higher standard of living. The focus on employment has overlooked the quality of jobs and prospects for employees to share in the spoils of improved productivity.
It remains to be seen how the forthcoming Christmas trading period will unfold and whether this, combined with new business rates which come into effect from April 2017 will expose the retail and hospitality sectors and their dependence on people having a level of disposable income.
In our view the signs are not looking good for those UK businesses with high overheads and low margins and those that have hung on since 2008 but still have high levels of debt to service.

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General Insolvency Liquidation, Pre-Packs & Phoenix Rescue, Restructuring & Recovery Turnaround

Falling Confidence Among SMEs Supports Evidence of a Long L-Shaped Recession

Recently released insolvency figures show relatively little change year on year, suggesting that the debate about whether the recession would be a V-, U-, W-, or an L-shape Is now over.
It is four years since the economy collapsed and the evidence is piling up that it is flatlining. Whatever the technical definition for coming out of recession may be (ie two successive quarters of growth), a growth of 0.2% for the UK economy means it continues to bump along the bottom of an L-shaped economic decline, whether it is called a recession or not.
Had the recent decline followed the pattern of previous ones the numbers of insolvent companies would by now be climbing noticeably, as they are generally held to do when an economy is on the road to recovery.
However, the latest CBI quarterly survey shows a sharp decline in confidence among small and medium sized businesses, reporting flat domestic orders in Q3 and export orders down by 8%. They expected domestic orders to fall by another 4% in the final quarter, no growth in exports and were indicating intentions of reducing their stock holdings – hardly suggestive of any optimism there.
Perhaps the most interesting feature of the just released quarterly insolvency figures is the noticeable increase in the number of Company Voluntary Arrangements (CVAs) relative to the numbers of companies in Administration as going concern formal insolvency procedures. Compared to the same quarter last year, CVAs rose by 29.6%, while Administrations rose by only 6.3% perhaps reflecting the adverse publicity over the use of Pre-Pack Administrations.
Many commentators are predicting a lot of insolvencies lining up for the end of Q4. Since a rise in insolvencies traditionally indicates the emergence from recession, perversely, this suggests that they are being optimistic rather than pessimistic.
But if the economy doesn’t recover and there is a rise in corporate insolvencies, this will be truly damaging for the UK. There is a huge difference between insolvency to restructure a business to prepare it for growth and insolvency to close it down.
Continuing low interest rates and no discernible evidence of banks or other creditors really piling on the pressure, nor any sign of the restructuring that normally indicates the bottom of a recession, plus the plummeting confidence of the country’s SMEs, suggest that the economy will bump along the bottom Japanese-style for the foreseeable future at best or will decline further at worst.

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

Are Estate Agencies Safer Businesses Now than they were in 2008?

The sub prime mortgage crisis that precipitated the 2008 global recession led to plummeting property prices, very limited mortgage lending, repossessions and to a dramatic slump in the housing and commercial property markets.
Estate agencies were among the first businesses to feel the effects of the crisis. By December 2008 an estimated 40,000 employees had lost their jobs while around 4,000 estate agency offices -approximately one in four – had closed.
The smallest agencies, of perhaps four or five branches or less, were worst affected particularly if they depended solely on property sales.
So is the worst over now for the estate agency business? Not if the most recent information on the housing market is any indication.
Gross mortgage lending declined to an estimated £9.8 billion in April 2011, down 14% from £11.4 billion in March and the number of mortgages approved for house purchases hit a new low in April, at 45,166, the lowest April figure since records began in 1992.
The Council of Mortgage Lenders predicts that the numbers of homes repossessed will rise from 36,000 in 2010 to 40,000 in 2011 and 45,000 in 2012 and the online housing company Rightmove reports that average unsold stock rose from 74 to 76 properties per branch, reaching the highest ever level for May.
Although the housing market varies significantly in different parts of the UK, with London booming and East Anglia holding steady while the north suffers there is also evidence that the demand for rented property and buy to let property is rising along with rent levels.
None of this suggests that the business of estate agency is likely to be any more secure for a few years yet.  If the High Street agents are to survive they need to revisit their business models, diversify their activities into letting, make use of online marketing and be sure they are up to speed on all the regulations governing landlords’ and tenants rights’ and other property letting regulations.

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County Court, Legal & Litigation General Insolvency Voluntary Arrangements - CVAs Winding Up Petitions

A Significant Increase in Winding Up Petitions

The last couple of months have seen a significant increase in the numbers of Winding Up Petitions (WUPs) being filed in the High Court.
K2 Business Rescue has been monitoring the number of petitions and notes that since April 2011 they have significantly increased.
Weekly averages of 100 WUPs were filed during February and March and have increased to 150 per week in April and May. This compares to a weekly average of 92 during the last quarter of 2010
Many companies in difficulty have been hanging on by their fingernails while hoping their sales will pick up.
While the picture and possible explanations are unlikely to be clear until the quarterly insolvency statistics are released, the increase in the number of petitions is likely to have been influenced by the enduring lack of cash with businesses trying to collect in their overdue debts.
A WUP is normally only filed after efforts to collect payment have been exhausted or more often ignored where the petition is a last resort, the result of frustration. This is certainly the case with HMRC who file most of the petitions.
In view of the rising numbers of compulsory WUPs it is possible that they may overtake the previously historically higher numbers of voluntary liquidations as creditors run out of patience.

Categories
General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround

Are Government Insolvency Statistics Concealing the Number of Insolvent Companies?

As a consequence of the global financial crisis it is reasonable to assume that the numbers of companies in financial difficulties serious enough to precipitate insolvency would be increasing.
However, figures for the second quarter of this year released by the UK Insolvency Service in August show that there were 2,080 companies in England and Wales that were placed into liquidation.
These are made up of compulsory liquidations and creditors voluntary liquidations and showed a 0.5% increase on the previous quarter but a decrease of 19.1% on the same quarter in 2009.
Compulsory liquidations were down 9.9% on the previous quarter and 21.0% on the corresponding quarter in 2009, while creditor voluntary liquidations were up 5.4% compared with the previous quarter but down 18.3% compared to the same quarter in 2009.
It would be tempting to infer from these figures that the economy is beginning to recover and the pressure on companies is easing.
It is possible, however, that the decline in liquidations is concealing the number of companies in financial difficulties because of a lack of pressure from creditors other than the HMRC (Her Majesty’s Revenue & Customs ), the only active creditor currently seeking winding up orders in the courts.
The Government’s Comprehensive Spending Review in October may reveal the full impact on UK insolvencies.
Even if the UK avoids a double dip recession, there is a risk that the UK economy could develop a twin track economy, with public-sector-dependent industries facing higher levels of financial distress than sectors which are less directly linked to government spending cuts.
Some commentators argue that while Corporate insolvencies are still well below the numbers that would normally be expected at this point in the cycle the slight quarterly rise in the number of liquidations may signal that conditions are starting to turn against UK companies once again.
The lower than expected number of insolvencies is ascribed to a variety of proactive measures, HMRC Time to Pay arrangements and bank forbearance, together buying time for companies to deal with their financial situation. However, this may perhaps have only delayed the inevitable for others that are less robust or those that fail to use the time by taking remedial action to reduce costs or implement other steps that ensures survival.