Analysis of corporate insolvency trends in the United Kingdom over the next 4 years

Transcription

1 Analysis of corporate insolvency trends in the United Kingdom over the next 4 years Cork Gully LLP June

2 Analysis of Corporate Insolvencies in the UK June Contents Introduction 1 Economic outlook 2 The outlook for corporate insolvencies in the UK 4 Insolvencies by type and size 5 This report tracks, on a quarterly basis, the number of insolvencies and generates trends in insolvency both in aggregate, and by industry sector. Using an advanced econometric model, a forecast of the number of insolvencies over the next 4 years has been developed. Insolvencies by region 6 Corporate insolvencies by sector in Great Britain 7 - Manufacturing 7 - Construction 8 - Wholesale & retail and hotels & restaurants 9 - Transport, storage and communication 1 - Financial, real estate and business services 11 Appendix 1 - Insolvencies in the United Kingdom and Great Britain 12 - Insolvencies in Great Britain, by sector 12 Appendix 2 Based on a solid heritage we are an advisory firm bringing clarity to complex restructuring, recovery and insolvency situations. The firm remains as committed to our founding principles today as we were a hundred years ago. Our directors and staff have worked together for over ten years, reorganising operations and structures to deliver sustainable stakeholder value. The current trading environment is increasingly complex, so the solutions we provide for our clients are more creative, more responsive and more effective than ever. - Annual % change in insolvencies in Great Britain, by sector 13 About Cork Gully 14

3 Cork Gully LLP Analysis of Corporate Insolvencies in the UK June Introduction Economic outlook This report analyses trends in corporate insolvencies over the next four years. While early saw the Eurozone sovereign debt The latest official data show that, in Q1, crisis lose some focus in the media, recent political insolvencies were 4. higher than in the same events on the Continent have renewed concerns about quarter a year ago. Our modelling, based on the latest the parlous state of the Eurozone economy and the official economic forecasts from the Office for Budget colossal scale of government debt among nations in the Responsibility (OBR), suggests that insolvencies for single currency area. The election of socialist Francois as a whole will be 6.5% higher than a year ago. Hollande as president of France and a backlash against This is slightly up from the 4. forecast in the previous pro-austerity political parties in Greece have increased Cork Report and mainly reflects a worsened outlook political tensions in the Eurozone. The race is now on for for financial and business services firms, which will be Eurozone leaders to reach a credible consensus which affected by the escalating debt crisis in the Eurozone. balances the need for government deficit reduction Annual insolvency numbers are not expected to start with the need for a return to solid economic growth. At falling until. present, the economy of the single currency area looks set to contract this year. Weak economic growth this year will keep insolvencies elevated across most sectors of the economy. In the UK, economic conditions also remain challenging. Manufacturers will be affected by the economic The preliminary estimate of economic growth in Q1 slowdown in the Eurozone, which will constrain showed a. quarter-on-quarter contraction in output, demand for exports. Construction firms will be affected following on from the.3% contraction seen in Q4 by weaknesses in the housing market and reduced and landing the UK in its first double-dip recession since government demand. Business and financial services the 197s. Compared with a year ago, the economy will be affected by the global economic slowdown and has not grown at all. In the short-term, weak domestic exposure in financial markets. And consumer facing demand a result of squeezed household budgets and sectors will continue to face a challenging environment government spending cuts will be paired with curbed as UK households see their living standards squeezed export growth as the Eurozone enters recession, leaving by weak earnings growth and high unemployment. little scope for strong economic performance. Contraction at the start of lands the UK economy in its first double-dip recession since the 197s, while political events in the Eurozone threaten to bring down the single currency area. After remaining relatively subdued in the media for much of the first quarter of, recent political events on the Continent have led to renewed concerns about the stability of the single currency area. The election win of Francois Hollande in France may be yet another stumbling block on the Eurozone s road to recovery from its sovereign debt crisis. The new French president wants to renegotiate treaties and shift EU policy away from fiscal austerity and towards supporting economic growth, which could potentially lead to volatility in bond markets due to increased concern about government debt levels. Overall, output in the Eurozone looks set to decline in ; the latest International Monetary Fund (IMF) predictions point to a.3% contraction in the Eurozone economy this year, followed by growth of just.9% in. Recession in the Eurozone will weigh on global economic prospects. In the UK, the Office for National Statistics preliminary estimate of Gross Domestic Product (GDP) in the United Kingdom for Q1 showed the economy contracting at a quarter-on-quarter rate of., following a contraction of.3% in Q4. This means the UK is now in the first double-dip recession since the 197s. Sector data showed output in the production industries fell at a quarter-on-quarter rate of.. Output in the construction sector decreased by a sharp 3., while in the all-important services sector output was.1% higher compared with Q4. Going forward the weak Eurozone economy will curb demand for UK exports; just under half (47.) of the UK s goods exports go to the single currency area. Combined with a still fragile consumer environment and falling government demand for goods and services, the domestic growth outlook is frail. The Government s independent forecasting body - the Office for Budget Responsibility - expects the economy to grow by.8% this year and by 2. in. While these growth rates are better than IMF forecasts for the Eurozone economy, they remain below pre-financial crisis trends. Between 2 and 27, economic growth in the UK averaged 3.1%. Despite weak growth in the UK, the policy response from central bankers and government is likely to be relatively minimal. The scope for fiscal expansion is limited by market fixation on sovereign debt and the potential political embarrassment that would arise from moving away from deficit reduction targets. Interest rates are already at rock bottom levels and while further quantitative easing from the Bank of England remains an option, this looks like an unattractive policy measure at a time of stubbornly high inflation. 1 2

4 Cork Gully LLP Analysis of Corporate Insolvencies in the UK June Figure 1: UK GDP - annual growth Figure 2: Eurozone GDP - annual growth 3% 1% -1% - -3% -5% % 1% -1% - -3% -5% Insolvencies to rise in amid weak economic outlook. The outlook for corporate insolvencies in the UK Source: ONS, OBR Source: IMF Based on official projections for economic growth, from Figure 3: Insolvencies in the UK, by quarter The present crisis is far from over, as events in the euro area illustrate weekly. Our own economy is still not back to health. Although inflation has fallen back in recent months, it is still too high. And despite efforts to stimulate the economy, the recovery is proving slower than we had hoped. Bank of England Governor the Office for Budget Responsibility, we have produced forecasts of corporate insolvencies in the UK over the next five years. Data on insolvencies is sourced from the Insolvency Service, and covers company liquidations, receiverships, administrations and company voluntary arrangements. The latest available data shows insolvencies in the UK in Q1 were some 4. higher than a year ago. After a relatively sharp fall in insolvencies in, following a peak in, insolvencies started creeping up in Q4 22 Q4 23 Q4 24 Q4 25 Q4 26 Q4 27 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Mervyn King Our model, which is based on the correlation between insolvencies and economic growth, suggests that insolvencies will continue rising in. Figure 4: Insolvencies in the UK, by year 28 For as a whole, insolvencies rose by 4.7% compared with, while for, insolvencies are expected to rise by a further 6.5%. Insolvencies are expected to fall 13 from late onwards, as the UK economic recovery gains a stronger foothold and the Eurozone sovereign debt crisis reaches some sort of resolution either in the form of some countries leaving the single currency area or steps towards fiscal union. However, a return to pre-recession insolvency numbers remains unlikely to occur over the coming years, given the tough trading Figure 5: Annual % change in insolvencies (LHS) and annual % change in real GDP (RHS) environment and weakness of demand % 1% 1-1% % -2-5% Real GDP Insolvencies 3 4

5 Cork Gully LLP Analysis of Corporate Insolvencies in the UK June Insolvencies by type and size Insolvencies by region Rise in insolvencies in recent quarters largely driven by sharp increase in liquidations. Insolvencies in Scotland continue to climb. This rise in insolvencies in the UK in Q1, compared Figure 6: Liquidations in the UK, by quarter Insolvencies rose in England & Wales, Scotland and Figure 9: Insolvencies in England and Wales, by quarter with a year ago, was almost entirely driven by an increase in liquidations. Liquidations rose by 6. over this time period. In contrast, receivership appointments 1 were 6. lower than a year ago, while administrations were down 1.3%. Company voluntary arrangements were 5. lower than the same quarter a year ago. Insolvency data shows that small companies with 5 or less employees accounted for 91.5% of insolvencies in Q1 22 Q1 23 Q1 24 Q1 25 Q1 26 Q1 27 Q1 Q1 Q1 Northern Ireland in the first quarter of, compared with the same quarter a year ago. While insolvencies in England & Wales remain some 17. below their peak seen during the financial crisis, insolvencies in Northern Ireland are just 4.3% lower while in Scotland insolvency numbers in Q1 were larger than at any time during the financial crisis. Indeed, in Q1 insolvencies in Scotland were some 22.3% higher than they were in the same quarter a year before Q1 22 Q1 23 Q1 24 Q1 25 Q1 26 Q1 27 Q1 Q1 Q1 the UK in. Last year, insolvencies among businesses with less than 2 employees increased by 12.1% compared with. This contrasts sharply with large firms with 51 or more employees, which saw insolvencies decline by 8.9% last year. Overall, this suggests that the current economic climate is hitting micro businesses hardest. Despite the rise in insolvencies among the smallest firms last year, the most significant business failure rate is for companies with 11-5 employees, as Figure 8 illustrates. Figure 7: Receiverships, administrations and company voluntary arrangements (CVAs) in the UK, by quarter Q1 22 Q1 23 Q1 24 Q1 25 Q1 26 Q1 27 Q1 Q1 Q1 Compared with England, the economic outlook in other parts of the UK is likely to be weaker over the coming years. In Scotland, Northern Ireland and Wales, public sector employment account for 23.8%, 27.9% and 25.8% of total employment respectively. These are all much higher than the 19.6% seen for England, meaning that these economies are more exposed to UK government spending cuts over the coming years. Last year, the Scottish economy grew by.5%, lower than the.7% growth seen for the UK as a whole. Figure 1: Insolvencies in Scotland, by quarter Q1 22 Q1 23 Q1 24 Q1 25 Q1 26 Q1 27 Q1 Q1 Q1 Figure 8: Annual % change in insolvencies (LHS) and business failure rate (RHS) in, by size of business Figure 11: Insolvencies in Northern Ireland, by quarter 14 15% 3% Receivership appointments comprise administrative receivers appointed under the 1986 Insolvency Act (and the 1989 Order for Northern Ireland) and certain other receiver appointments, for example under the Law of Property Act % -5% Number of employees % Q1 22 Q1 23 Q1 24 Q1 25 Q1 26 Q1 27 Q1 Q1 Q1 Source: The Insolvency Service Source: The Insolvency Service, Experian 5 6

6 Cork Gully LLP Analysis of Corporate Insolvencies in the UK June Corporate insolvencies by sector in Great Britain 2 2 Data on insolvencies by sector are not available for Northern Ireland. Therefore, the sectoral analysis in this report focuses on Great Britain Also note that directly comparable sectoral data are only available from Q3 27 onwards. Hence, the analysis in this section looks at the period from onwards. Construction Economic prospects across sectors will remain variable, though for the most part will be weak in the short-term. Domestic demand for goods and services in the UK will be constrained by the ongoing squeeze on household budgets and fiscal retrenchment by government. The ability of businesses to export their way to growth will be curtailed by economic contraction in the Eurozone in. This makes for a challenging trading environment in the short-term. Insolvencies pick up this year as manufacturing growth slows. Manufacturing growth has slowed in recent months, possibly reflecting ongoing weakness in the UK s largest export market the Eurozone. Manufacturing output fell at a year-on-year rate of. in Q4 and.9% in Q1. Manufacturing Against a backdrop of recession in the Eurozone, we expect insolvencies in the manufacturing sector to rise by 3.7% this year, with insolvencies falling from onwards as the global economic environment stabilises and growth picks up. The continued weakness of sterling compared with before the financial crisis means that British exports should be relatively price competitive going forward, supporting growth in the manufacturing sector. However, continuous solid growth in British manufacturing will depend on businesses rebalancing their export markets away from the Eurozone and towards fast-growing developing countries. If manufacturers fail to tap into emerging market economies, the growth outlook for the sector could be weaker, with higher insolvency numbers. Figure 12: UK manufacturing output - annual % change 8% 6% - -6% -8% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Figure 13: Manufacturing insolvencies in Great Britain, by year Construction sector remains in the doldrums amid falling government demand and a floundering housing market. Official data showed a sharp decline in construction sector output at the start of. Between Q4 and Q1, output in the sector declined by 3. and this was the main factor which pushed the UK economy back into recession. While a number of economists have raised concerns about the accuracy of the official construction data, it is likely that the sector is flat-lining at best. Weakness in the sector can be expected to persist over the coming years as fiscal austerity takes hold. Office for Budget Responsibility forecasts suggest that government investment will fall by 5. this year and by a further 3.6% in. This will weigh on the growth prospects of the construction sector. The weakness of the housing market also remains a concern for businesses in the construction sector. In the first half of last year (the latest period for which data are available), housing completions were 35. lower than five years ago. Although the March Budget reaffirmed commitment to a simplification of the planning system, it will take time before planning reform translates into increased housebuilding. Until then, the outlook for the construction sector remains weak and we expect insolvencies to rise by 14.3% this year and by 5.8% in. Figure 14: UK construction output - annual % change 15% 1 5% -5% -1-15% -2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Figure 15: Construction insolvencies in Great Britain, by year

7 Cork Gully LLP Analysis of Corporate Insolvencies in the UK June Wholesale & retail and hotels & restaurants Transport, storage and communication will be difficult for retailers, though conditions should improve from next year. Insolvencies rise as the economy slows. The short-term outlook for retailers remains challenging, given the ongoing financial squeeze on UK households. The triple pressures of high unemployment, weak earnings growth and stubbornly above-target inflation have all eroded the spending power of consumers in the UK; real (i.e. inflation adjusted) household disposable incomes fell by 1. last year and the Office for Budget Responsibility expects only marginally positive growth this year and next. Figure 16: UK distribution, hotels and restaurants output - annual % change - -6% -8% Growth in the transport, storage and communication sector is closely correlated with overall economic growth. When the economy is growing, more goods are delivered as businesses build up inventories of goods (and services) to sell which is good news for firms in the business of transport and storage. During a downturn, inventory destocking among businesses curtails growth in the transport sector. Similarly, demand for communication technology is also closely related Figure 19: UK transport, storage and communications output - annual % change 6% - -6% -8% Traditional High Street retailers remain under pressure from the rise in internet retailing a major structural change in the way we purchase goods and services in the UK. Internet retail sales values in March were 15. higher than a year ago, with particularly strong growth in internet sales by clothing & footwear stores for these stores, internet sales values were a significant 27. higher than a year ago. Squeezed spending power and the onward march of the internet means that retailers that neither offer value nor respond to technological change face tough times ahead. Clinton Cards which recently went into administration is in many ways a perfect example of a business which failed to adapt to lower-priced competitors and new media such as e-cards. -1 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Figure 17: Retail and wholesale insolvencies in Great Britain, by year to business activity. In line with the weak economy, transport sector insolvencies in Q4 were some 2.8% higher than in Q4. The weak short-term economic backdrop over the coming year means we expect insolvencies in the transport, storage and communication sector to rise by 7. this year and 1.7% in. Insolvencies in the transport sector are expected to gradually decline from onwards as economic growth gains momentum. -1 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Figure 2: Transport, storage and communication insolvencies in Great Britain, by year The weak consumer environment means we expect insolvencies in the retail and wholesale sector to rise by 4.6% this year. Insolvencies are expected to stabilise in and then fall from onwards as consumer spending power in the UK gradually recovers. The outlook for hotels & restaurants is likely to be worse than for retail over the coming years, given the discretionary nature of the services sold by these businesses. We expect insolvencies to rise by 6.3% this year before stabilising in. Figure 18: Hotel and restaurant insolvencies in Great Britain, by year

8 Cork Gully LLP Analysis of Corporate Insolvencies in the UK June Financial, real estate and business services Appendix 1 Exposure to the Eurozone crisis threatens financial and business services. Insolvencies in the United Kingdom and Great Britain. Despite growing more strongly than most other sectors of the economy in recent quarters, insolvencies in the business services and finance sector rose strongly last year by 6.3%. Insolvencies rose particularly strongly among financial services firms last year by 19.. ONS data show that jobs in the financial & insurance sector declined by a further 4, in to stand at their lowest level since Continued tough trading conditions mean that a return to the pre-financial crisis peak number of jobs in the sector remains highly unlikely any time soon. This rise of Eastern financial centres such as Shanghai and Singapore, and concerns about new regulation and an EU-wide financial transactions tax, also place downward pressure on growth in the UK financial services sector. In January this year, Francois Hollande, now president of France described the world of finance as his true adversary suggesting that future EU-wide discussions could become more antifinance in tone. We expect insolvencies in financial, real estate and business services to rise by 9.8% this year and not to start falling until. An escalation of the Eurozone sovereign debt crisis remains a significant threat to businesses in this sector. Figure 21: UK business services, real estate and finance output - annual % change 8% 6% - -6% -8% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Figure 22: Business services, real estate and finance insolvencies in Great Britain, by year UK Great Britain Manufacturing Construction Wholesale and retail trade Hotels and restaurants Transport, storage and communication Financial, real estate and business services f f f f f f 17,822 16,116 17,174 18,621 16,595 22,792 26,443 22,676 23,733 25,272 25,619 25,97 24,186 23,327 17,68 15,995 17,36 18,493 16,431 22,583 26,196 22,294 23,388 24,871 25,165 24,597 23,645 22,749 Other Insolvencies in Great Britain, by sector. f f f f f f 2,39 2,977 2,311 2,45 2,12 2,21 1,84 1,637 1,454 3,472 4,596 3,86 3,972 4,539 4,84 4,88 4,857 4,829 3,226 3,688 2,759 2,946 3,81 3,55 2,945 2,8 2,66 1,267 1,493 1,426 1,599 1,7 1,694 1,633 1,548 1,467 1,1 1, ,632 7,727 6,611 7,27 7,718 7,737 7,388 6,882 6,46 4,577 4,589 4,536 4,934 4,785 4,911 4,976 5,9 5,43 Total Great Britain 22,583 26,196 22,294 23,388 24,871 25,165 24,597 23,645 22,

9 Cork Gully LLP Analysis of Corporate Insolvencies in the UK June Appendix 2 About Cork Gully LLP Annual % change in insolvencies in Great Britain, by sector Manufacturing Construction Wholesale and retail trade Hotels and restaurants Transport, storage and communication Financial, real estate and business services In 196 WH Cork established WH Cork & Co as an insolvency practice largely focused on helping businesses in the grocery trade. In 1935, WH Cork formed a partnership with his son Kenneth and another accountant, Harry Gully, creating Cork Gully. After WH Cork s death and a period of war service, Kenneth became the owner of the firm and built the business to become the leading name in the field of insolvency work. Sir Kenneth Cork (as he later became known) was chairman of the Cork Committee, which published the Cork Report in 1982, leading to a change in primary legislation and subsequent introduction of the Insolvency Act Stephen Cork now leads the business, representing the fourth generation to be in the field of restructuring. Stephen and the vastly experienced team he has brought to Cork Gully have advised both owner-managed businesses and main listed publicly quoted companies on the recovery strategies available to the Board as well as their financiers. We provide a comprehensive range of formal and informal corporate recovery and insolvency services. Our services are delivered by a team of seasoned professionals who have extensive experience of the restructuring environment. The current trading environment is increasingly complex and fast moving so the solutions we provide to our clients are more creative, responsive and effective than ever. More information can be found at Nature of assignments undertaken:- Restructuring Cash flow management Operational restructuring Distressed M & A Refinancing Return of capital Debt Advisory Debt advisory services Independent business review Workout of stressed and distressed property assets Managed exits Debt for equity swaps Compromise agreements Recovery Litigation support Forensic accounting Investigation services Asset tracing and recovery Creditor services Insolvency Contingency planning Advice to board of directors Administrations Company voluntary arrangement Receiverships Insolvent liquidations Personal insolvency 13 14

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