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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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Banks, Lenders & Investors Business Development & Marketing Finance General Turnaround

Risk taking? Fat chance

This week the independent UK body researching issues related to pay, The High Pay Centre, published its annual analysis of CEO pay to reveal they are now paid 143 times as much as their staff.
Meanwhile, the Telegraph business pages report that corporate giants and PE (Private Equity) firms have accumulated capital reserves amounting to £4.1 trillion.
At the same time earnings in the UK have fallen by 10-12% in real terms since 2008, according to the Bank of England, and the Fawcett Society has released findings after questioning 1000 low-paid women that indicate that the gap between men’s and women’s pay has widened for the first time in five years.
Is there any relationship between these facts?
Possibly. Despite reports that the UK economy has recovered from the 2008 Great Recession, business and economic commentators, among them the Daily Telegraph’s Allister Heath, are arguing that it is still not sufficiently dynamic.
Heath points to a combination of factors including that Government measures introduced to mitigate the recession’s effects have frozen parts of the economy so that people fear moving jobs, businesses are not investing and so-called zombie companies are being allowed to survive well past their effective life.
He argues that a little “creative destruction” is required to really get things moving and that economies need to be in a state of permanent revolution in order to be successful.
He may have a point, but while there is uncertainty about future direction of policy in the run-up to an election, not to mention so much unfinished bank and financial sector regulatory reform, an ongoing unease about the fairness and morality of the way our economic system is structured and currently operates and so much uncertainty about a possibly stagnating Eurozone ( the UK’s biggest export market) there are likely to continue to be more questions than answers and precious little appetite for risk taking of any sort. Those who have will hang on to what they have accumulated.
Why should CEOs put their own salaries at risk by taking risks for the benefit of apathetic shareholders?

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Banks, Lenders & Investors General Insolvency Rescue, Restructuring & Recovery

Are We About to See a Rise in Insolvencies?

New research by the insolvency industry’s trade body, R3, has found that the number of zombie companies has gone down by just over 50,000 since November last year.
Zombies are defined as companies that are only paying off the interest on their debt.  However, R3 also found that more SMEs are now in distress as they struggle to negotiate new payment terms with lenders or to repay loans when they fall due.
As banks have been set new targets for improving their capital reserves they are unlikely to do anything other than improve their position.
However we at K2 believe they are also unlikely to pull the plug, so the march of the zombies will continue for some time.
As a result we are unlikely to see the number of insolvencies rise until interest rates are raised. Indeed any significant rise in interest could cause the carnage that normally follows a recession where it is in fact evidence that the economy is coming out of recession.
What’s your view? Are we about to see a rise in insolvencies?

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Banks, Lenders & Investors General Rescue, Restructuring & Recovery Turnaround

Investors need to rethink their requirements

Many of us believe that a change in investor culture is long overdue. We need to incentivise long-term investment in sustainable growth instead of short-term ‘quick flip’ or ‘get rich quick’ schemes that deceive everyone into thinking that making money is risk free and easy.
It is this short-term thinking that has made it more difficult for Private Equity firms to raise new funds for further investment.
Private Equity firms depend on their reputation for making profits for their investors and their problem since the Credit Crunch of 2008 has been that funds have been tied up in businesses that are effectively zombies because of the amount of debt they have, no matter whether these businesses may have good potential for growth.
Similarly both lenders and investors are very wary of taking a risk with new and small businesses, hence the Government’s failure to persuade funders to support start-up companies and SMEs, even profitable ones and those with potential for growth. The only source of funds really available for such businesses are book debt and asset based lenders but these only improve cash flow they don’t provide equity or loan capital for investment.
To address the funding culture issue we need to justify a switch from investing in property to investing in businesses. This will involve understanding a risk rated return on investment that provides for better returns to investors.
There are a number of ways of achieving this change of investor behaviour, one is to penalize investment in property by taxing them, another is to provide for matched funding from banks alongside new equity, possibly with a Government guarantee, another would be for debt forgiveness by banks to restructure their ‘zombie’ client loans alongside new equity, others could be an expansion of the Enterprise Investment Scheme and Seed Enterprise Investment Scheme, or simply a reduction in the corporation tax rate.
But all this requires a Government to confront those who view property as their source of security.

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

Calls for Private Equity investment to stimulate growth

There has been a chorus of voices recently wanting to see private enterprises or Private Equity firms investing to stimulate a recovery and growth, both in the UK and Europe.
It’s all very well demanding someone else invest money but why should they? There are many ‘zombie’ companies that could be ripe for investment but in effect are overvalued due to the debt burden which will almost certainly never be repaid. These firms need restructuring with bank lenders prepared to take a hit if they are to be attractive for investors.
The chorus may not be aware that investors normally rank behind the bank, or are they hoping investors are naïve enough to underwrite the bank debt by pouring good money after bad? Private Equity companies rarely have either the time or the patience to spend on business improvement as most rely on financial restructuring followed by a swift exit to deliver a huge return on investment to their own investors.
Another factor is Private Equity’s reliance on cheap and easy money to recover their investment by refinancing assets and to realize profits by funding a sale where the lending market underwrites their returns. This is how many of the banks were left with bad debts so it may be a while before they return to providing cheap and easy money.
Private Equity firms, like most alternative investments, depend on their ability to attract funds from investors who want to see an adequate return, normally in a relatively short period. 
Since the financial crisis began many investments by Private Equity have been locked in due to the inability to refinance or sell their investments, which has impacted on their return to investors and thus on their ability to raise new funds.