ECONOMY
A storm of bankruptcies is on the horizon, experts warn

As the storm clouds continue to darken over Britain’s economy, forcing companies and families to cut costs, at least one industry is gearing up for a boom in business.

Insolvency and restructuring specialists are preparing for a flurry of activity as supply chain issues, spiralling energy costs and rising inflation trigger a wave of corporate distress and bankruptcies.

The signs are already ominous. During the first three months of the year, around 137,000 businesses closed their doors for good in the UK, a jump of nearly a quarter on the same period in 2021, according to the Office for National Statistics (ONS).

There were also nearly 5,000 voluntary insolvencies in England and Wales – the highest level since the Insolvency Service launched its quarterly survey in 1960.

And things are only expected to get worse. “On a logical basis, you would expect to see an increase in the need for companies to restructure and an uptick in insolvencies as Covid support ends and the year goes on,” says Geoff Rowley, the chief executive of restructuring firm FRP Advisory.

Rowley cautions that there is a “degree of uncertainty” about when an uptick in activity will occur, adding that FRP, which has worked on the administrations of Corbin & King, Debenhams and Carluccio’s, does not currently think there is a need to increase its headcount.

Yet he expects there to be something of a “false dawn” during the summer before the real pain starts to be felt during the autumn. “That’s when it will start to affect everyone,” Rowley says.

Restructuring and insolvency firms were forced into a quiet few years amid Covid as ministers pumped unprecedented amounts of support into the economy to keep struggling companies afloat, dampening demand for bankruptcy specialists.

The Government’s recovery loan scheme, which offers an 80pc guarantee on debt of between £25,000 and £10m, will come to an end on June 30, however, and experts predict it will trigger further hardship for already struggling businesses.

Christina Fitzgerald, the president of R3, the insolvency and restructuring trade body, says there is still a potential backlog of cases from the pandemic, but that the quiet period forced its members to cut costs.

She says: “The drop in insolvencies over the pandemic period has meant that training budgets have been scaled back so there are fewer people at the junior end of the profession than there might have been if this hadn’t happened, and a number of our members are finding staff recruitment a challenge.”

Around 6,000 fewer companies and around 7,000 fewer individuals have entered an insolvency process over the last two years compared to 2018 and 2019, Fitzgerald points out, which suggests there are potentially a number of insolvency cases that would have probably happened if the Government hadn’t stepped in to support businesses and individuals in the way it did.

Others believe that the backlog extends much further than the pandemic. “Since 2007-08 there hasn’t been a normal environment,” says Simon Bonney, a managing director at Quantuma, a restructuring firm based in the Square Mile.

“At the time, the government used a lot of economic levers to soften the blow for businesses, including introducing very low interest rates.”

Bonney adds that the low interest rate environment coupled with huge pandemic support schemes has dramatically increased the number of British “zombie” companies – businesses solely being propped up by government intervention.

“Some people would say that it would be very healthy for a relatively large number of businesses to fail. This would, in turn, increase competition in the market,” he says.

Policymakers have issued stark warnings about the state of the British economy in recent weeks, with Andrew Bailey, the Governor of the Bank of England, warning that inflation will hit a four-decade high this year and GDP will plunge, thrusting the UK into recession.

At its heart, business distress is being caused by multiple headwinds including supply chain friction, labour shortages, surging inflation and out of control energy prices.

Experts predict that the brunt of the pain will be felt in the retail, hospitality and construction sectors.

Glen Flannery, a restructuring and insolvency partner at City law firm CMS, says: “We’ve already seen a spike in failures in more vulnerable sectors such as construction and energy retailing.

“The impact in other sectors has been less pronounced, but the number of corporate failures has been trending upwards across the board as pandemic-related government support has been withdrawn.”

FRP’s Rowley believes the crisis in retail and hospitality could be particularly acute. He says: “Hospitality has had a bounce back post-pandemic, but consumers will be looking to tighten their belts in the autumn, especially when energy bills rise again in October.”

CMS’s Flannery agrees. “Many consumer-facing businesses, such as hospitality and leisure, have been experiencing a resurgence from pent-up demand following the abolition of Covid restrictions.

“However, this is predicted to soften as the sharp squeeze on household disposable incomes bites.”

Yet Quantuma’s Bonney thinks the economic hardship could be so widespread that the impending storm could be “sector agnostic”.

“There’s a lot of vulnerability at the SME [small and medium-sized enterprises] end of the market. Any business that is heavily reliant on energy is particularly susceptible to risk too.”

Britain’s small businesses also got hooked on cheap debt during the pandemic. At the end of last year, the Bank said a third of Britain’s small businesses were classed as highly indebted, more than double the amount than before the pandemic.

SMEs, many of which would not have met pre-pandemic lending requirements and never before borrowed, made up around two thirds of the £79bn increase in UK corporate debt between the end of 2019 and the first quarter of 2021, the Bank warned.

So how bad could things get – or, rather, how good might they get for insolvency and restructuring practitioners? Bonney is blunt: “There is a storm coming.”

Source: Τelegraph.co.uk

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