Credit, collections & insolvency news
The Centre for Economics and Business Research (CEBR) has forecasted an increase in business insolvencies from 28,000 to 33,000 after industry data revealed levels had risen faster than expected in the last quarter of 2023.
In September last year, CEBR predicted that we would see 7,000 companies going insolvent each quarter in the UK in 2024. CEBR says that the data came out for Q4 2023 about a week ago it was clear that we had reached that level already, with 6,788 insolvencies in England and Wales, 314 in Scotland and 81 in Northern Ireland in that quarter.
The forecast says that eonomic prospects for 2024 are improving with the likelihood of lower inflation and slightly faster growth. It is also likely that banks now feel more under pressure to justify their actions in closing down a business than they might have felt in the past, especially compared with the 1990s recession when banks would write off an entire sector with very little attention to the underlying profitability of the individual businesses concerned.
Whilst the relationship between the economy and companies in financial problems is lagged by about 18 months, the 2024 improvement is less relevant than one might think. Many of the companies in trouble are indebted as much to their landlords and to HMRC as to their banks. The landlords are mainly in financial distress themselves, though that is partly their own fault for not putting reserves aside for a rainy day during the good years when they were highly profitable. Meanwhile, the HMRC behaves a little like the Post Office in the worst years of ‘Post Office v Mr Bates’.
It is important to understand why UK businesses might go into insolvency. There is a theory that the companies most at risk are so-called zombie companies with high leverage who can pay their interest bills while interest rates are low but who will fail when interest rates rise. This theory was based on analysis of Japanese companies in the early part of this century. When Japanese property prices were sky high, many companies leveraged up their property investment disproportionately to their other activities and got into this situation.
On the whole, this is not the position in the UK, where research (e.g. by Goldman Sachs indicates there tends to be a negative correlation between growth and borrowing. The UK’s least lively companies often have a cash cushion. This is partly a reaction to the 1990s when banks’ behaviour to indebted companies was abusive and scarred the thinking of anyone running a business. They simply do not want to be exposed to the whims of banks whose behaviour risked being at best capricious and at worst, as was the case with RBS’s GRG group, downright criminal.
Instead, the companies going bust in 2024 and 2025 are largely ones that got into financial trouble in the Covid years and have never really escaped. Traditionally, construction companies are most at risk of going into liquidation and this has not changed. But both the retail and the hospitality sectors have nearly caught up with construction in terms of insolvency numbers in 2023. This is not surprising given the hits that they suffered during Covid.
CEBR says hospitality and retail businesses are some of the most likely companies to become insolvent in 2024.
Douglas McWilliams, Deputy Chair at CEBR, also argued that the companies going bust were not ‘zombie companies’, companies that earn just enough money to continue operating and service debt, but are unable to pay off their debt.
“The companies going bust in 2024 and 2025 are largely ones that got into financial trouble in the Covid years and have never really escaped.”