creditcontrol.co.uk
​
​

Insolvencies wildly gyrating, says Opus

​

Business pundits trying to discern what is going on with corporate insolvencies in 2024 must be starting to feel a lot like the Grand Old Duke of York’s 10,000 men being marched up and down that nursery rhyme hill.

Business failures certainly scaled the heights in 2023, reaching a record figure heading towards 27,000.  January and February this year continued the upward trend until they suddenly plummeted 24% year-on-year in March, possibly partially suppressed by the timing of Easter.  April saw a sharp rebound of a 35% year-on-year rise.  Now we have another fall in May 2024, down 19% year-on-year.

Given the apparent unpredictability of this key economic indicator, we asked Nick Hood, Senior Business Adviser, Opus Business Advisory Group to come up with an explanation.

“The record set last year was clearly driven by the inexorable rise in Creditor’s Voluntary Liquidations (CVLs), which soared to 81% of all failures.  Pre-pandemic in 2019, CVLs were only 67%.  The general opinion has been that this was at least in part a manifestation of battle-fatigued entrepreneurs calling it a day after the pandemic and then runaway inflation had savaged their balance sheets and profitability beyond salvation.”

“Another factor will have been the sharply higher interest rate environment following the debacle of the Mini Budget in autumn 2022, which has made servicing borrowings extremely challenging, especially for companies that took on extra debt to survive during the pandemic.”

“What may now be occurring is that the queue of businesses waving the white flag of commercial surrender could finally be diminishing more than two years after the last of the pandemic restrictions on creditor enforcement action were lifted.”

“In addition, our recent research into debt levels among smaller businesses (for example in the hospitality sector) shows significant debt reductions compared to a year ago, so it could be that to adapt a rather graphic American analogy, the leverage pig may be close to passing through the business rescue snake.  The interest rate reductions being eagerly anticipated until recently may now be postponed until later in the year as the Bank of England agonises over the ‘stickiness’ of service sector inflation, but businesses can at least see that particular light at the end of the tunnel.”

“Although more cautious observers remain unconvinced as yet by the argument that the UK economy has turned the corner, we seem to have climbed out of the slough of despair about our flat-lining performance that gradually suffused public opinion last year.  Several surveys have produced evidence of growing business confidence, which may both be encouraging businesses to battle on and tempting lenders and investors to take a more positive view.  Another straw in a warmer wind is the consensus from Mergers & Acquisitions (M&A) professionals that business valuations are returning to more rational levels.”

“Nevertheless, nobody can really predict the levels of insolvency activity for the rest of 2024 or beyond.  Despite the recent optimism, there are still too many over-borrowed businesses, the labour market remains problematic, profit margins are under sustained pressure from cost inflation that can’t be passed on to cash-strapped customers and the number of zombie companies with negative balance sheets continues to rise.”

“It's worth remembering that even after the fluctuations in insolvency levels in the past three months, the rolling 12-month total up to May 2024 is 44% higher than the pre-pandemic figure for the 12-months to February 2020.”