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

Transcription

1 the United Kingdom over the next 4 years. Cork Gully LLP February 2012

2 Introduction 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. 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 partners 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. The global economic outlook has weakened amidst the downward spiral of the Eurozone debt crisis which, due to lack of political commitment to agreeing a lasting solution for highly indebted states, has undermined confidence in the region and beyond. If European politicians fail to agree on a solution for the economic governance challenges facing the currency union, market pressure would likely force out one or more countries from the euro. As this would most likely cause sovereign default, damage to banks balance sheets may cause a renewed credit crunch and thus a major recession as lending dries up and companies and consumers stop all but the most essential spending. Even if politicians in the Eurozone are able to reassure the markets that a solution to the debt crisis can be reached, a recession for the currency area will not necessarily be avoided this year, as fiscal austerity and economic uncompetitiveness continue to constrain growth. The weak economic outlook for the Eurozone will almost certainly make for a poor shortterm growth outlook for the UK, as demand for exports is impaired and businesses become more reluctant to invest. Economic growth data for Q showed a 0.2% quarter-on-quarter contraction in the UK economy towards the end of last year, meaning the UK could already be in the grip of recession (defined as two consecutive quarters of negative quarter-on-quarter growth). Even if a recession is avoided, growth is likely to be subdued throughout this year. The latest official data shows that, following a sharp fall in insolvencies in 2010, after the recession, insolvencies rose by 6% in Our modelling suggests that, based on the latest official economic forecasts from the Office for Budget Responsibility, insolvencies are likely to rise still further in 2012, by about 4%. Weak economic growth this year will keep insolvencies elevated across most sectors of the economy. Manufacturers will be affected by the economic slowdown in the Eurozone, which will constrain demand for exports. Construction firms will be affected by weaknesses in the housing market and reduced government demand. Business and financial services will be affected by the global economic slowdown and exposure in financial markets. Consumer facing sectors will continue to face a challenging environment as UK households see their living standards squeezed by weak earnings growth and high unemployment. Page 1

3 Economic outlook Weak growth in 2012 and a real risk of recession, as the Eurozone sovereign debt crisis bears down on the global economy. The outlook for the global economy has deteriorated sharply in recent months, as the sovereign debt crisis in the Eurozone risks destabilising the global financial system. Austerity measures across much of the Western world, to address the colossal scale of government debt in some countries, will weigh on growth in the developed world for many years to come. Weak growth in the Eurozone will bear down on the UK economy too, through weakened business sentiment and reduced demand for UK exports. Combined with government spending cuts, growth in the UK is likely to remain sluggish at best in the short-term. As Figure 1 shows, forecasts by the Government s independent forecasting body the Office for Budget Responsibility (OBR) suggest that economic growth this year will remain far below the levels seen in the years immediately before the financial crisis. Furthermore, many economic forecasters believe the OBR is too optimistic on economic growth in 2012, with some expecting a recession this year. Indeed, the Office for National Statistics preliminary estimate of Gross Domestic Product (GDP) in the United Kingdom for Q showed the economy contracting at a quarteron-quarter rate of 0.2%. Sector data showed output in the production industries fell at a quarter-on-quarter rate of 1.2%. Output in the construction sector decreased by 0.5%, while in the all-important services sector which accounts for about three quarters of GDP - output was unchanged compared with Q The economic slowdown seen towards the end of last year thus affected all key sectors of the economy. Figure 1: UK Real GDP - year-on-year growth. In the short-term, exports in the UK will be sluggish with key export markets in Europe possibly in recession and other markets slowing down, while investment is unlikely to be buoyant against the gloomy economic background and frail business sentiment. Consumers will see their spending power squeezed by rising unemployment and weak earnings growth, while government spending cuts will also bear down on the economy. If the UK is indeed in a recession, policy measures to bolster the economy are limited. Further fiscal stimulus - effectively a loosening of austerity measures - seems unlikely at a time when markets are fixated on the issue of sovereign debt. Interest rates are already at rock bottom levels. Additional quantitative easing (QE) from the Bank of England has now occurred, with Bank of England Governor Mervyn King saying that falling inflation this year means there is scope for interest rates to remain low, and, if necessary, for further asset purchases. However, QE is not a panacea and 2012 is likely to be an extremely challenging year for businesses whatever the monetary policy stance of the Bank of England over the coming months. Page 2 Page 3

4 The outlook for corporate insolvencies in the UK Insolvencies rise in 2012 as economic growth slows. Based on official projections for economic growth, from the Office for Budget Responsibility, we have produced forecasts of corporate insolvencies in the UK over the next four 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 Q were some 11.9% higher than a year ago. After a relatively sharp fall in insolvencies in 2010, following a peak in 2009, insolvencies started creeping up in Our model, which is based on the correlation between insolvencies and economic growth, suggests that insolvencies will continue rising in For 2011 as a whole, insolvencies have risen by 5.8% compared with 2010, while for 2012, insolvencies are expected to rise by a further 4.2%. Insolvencies are expected to fall from 2014 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 prerecession insolvency numbers is unlikely to occur over the coming years, given the tough trading environment and weakness of demand. Further, there are significant downside risks to these forecasts, given the potential for the Eurozone sovereign debt crisis to take a turn for the worse, meaning that insolvencies in the UK could rise even higher this year. Figure 2: Insolvencies in the UK, by quarter. Figure 3: Insolvencies in the UK, by year. Figure 4: Annual % change in insolvencies (LHS) and annual % change in real GDP (RHS). Page 4 Page 5

5 Insolvencies by region Despite recent rises, insolvencies in Northern Ireland and England & Wales remain below their peaks seen during the recession. In Scotland, however, insolvencies have continued to rise and now stand at higher levels than in Indeed, in Q insolvencies in Scotland were some 94.8% higher than they were in the same quarter a year before. The picture of a weak outlook in Scotland, with elevated levels of corporate insolvencies, is likely to continue over the coming years. Scotland is notably more dependent on the public sector than the UK as a whole; public sector employment there accounts for 23.7% of total employment, compared with 20.6% for the UK as a whole. Therefore, fiscal austerity over the coming years is likely to hit the Scottish economy relatively hard. In Northern Ireland, public sector employment accounts for 27.7% of total employment, meaning that its economy is also very heavily reliant on public spending and likely to be disproportionately affected by fiscal austerity. Figure 5: Insolvencies in England and Wales, by quarter. Figure 6: Insolvencies in Scotland, by quarter. Figure 7: Insolvencies in Northern Ireland, by quarter. Page 6 Page 7

6 Corporate insolvencies by sector in Great Britain¹ Manufacturing Economic prospects across sectors will remain variable, though for the most part will be negative in the short-term. Consumer-facing sectors will be hit hard by rising unemployment and squeezed household spending power. Export-dependent sectors such as manufacturing will be affected by economic slowdown in the Eurozone this year, which will bear down on demand for British-produced goods. Sectors for which government demand is an important component, such as construction, will be affected by fiscal retrenchment over the coming years. So while the cause of weak economic prospects varies across sectors, the overall picture is one of weak and possibly negative growth. This in turn means that insolvencies are likely to remain elevated across most sectors of the UK economy. Figure 8: UK manufacturing output annual % change. Insolvencies rise in 2012, but fall back thereafter as exports pick up. After a relatively robust bounce-back in 2010 and the first half of 2011, growth in the UK s manufacturing sector has slowed, as Figure 8 shows. Weakening demand for exports will be a key factor keeping insolvencies elevated this year. From 2013 onwards, failures in the sector should fall back, with the ongoing weakness of sterling compared with before the recession helping to make British exports more price competitive. However, a competitive exchange rate is not sufficient to prevent further insolvencies; consistent growth in manufacturing will be contingent on businesses managing to rebalance their export markets away from the developed world and towards fast-growing emerging market economies. Figure 9: Manufacturing insolvencies in Great Britain, by year. Page 8 ¹Data 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 Q onwards. Hence, the analysis in this section looks at the period from 2008 onwards. Page 9

7 Construction Financial, real estate and business services Tough years ahead for the construction sector, as the housing market flounders and government spending falls back. The construction sector showed a strong recovery after the recession, and was a major contributor to the relatively robust growth seen in the UK economy in Construction sector output grew by 8.2% in 2010 and by 3.1% in 2011, following a 13.5% contraction in 2009 Figure 10 illustrates. However, with fiscal austerity commencing in earnest and Olympics related spending largely completed, government demand for construction activity is likely to be weak over the coming years. As a result the construction sector is likely to see sluggish growth over the next four years. Private sector demand for construction activities will also be relatively weak in the short-term. Office development in particular is likely to be weak, with a very sharp reduction in headcount in financial services which is likely to lead to a surplus of office space in London. House building also remains extremely weak compared with before the financial crisis; in 2010/11, housebuilding completions were some 44% below the level seen in 2005/06. Given this environment of weak demand, we expect insolvencies in the construction sector to rise by a further 14% this year, and by 6% in Exposure to the Eurozone crisis threatens financial and business services. While the globalised nature of many of Britain s service sector businesses (especially those in London) allows firms in this sector to expand even when domestic demand for services is weak, the global economic slowdown this year means we expect insolvencies to rise by some 9% this year, following a rise of 5% in The financial services sector remains exposed to the Eurozone sovereign debt crisis, which risks triggering a severe financial crisis. A number of major financial services firms, such as RBS and Citigroup, have announced job cuts in London this month. The financial services sector in London will also face increased international competition from Eastern centres such as Shanghai, Singapore and Hong Kong over the coming years. Insolvencies in financial, real estate and business services are likely to start falling back from 2013 onwards, but only gradually, due to falling government demand and a relatively weak economic outlook in the Western world over the next four years. Figure 10: Construction output annual % change Figure 12: Business Services and Finance output annual % change. Figure 11: Construction insolvencies in Great Britain, by year. Figure 13: Business services, real estate and finance insolvencies in Great Britain, by year. Page 10 Page 11

8 Wholesale & Retail and Hotels & Restaurants Sellers of discretionary goods and services struggle with the squeeze on household incomes. Businesses in the wholesale and retail sector are going through an adjustment to reflect the slower pace of consumer spending. Announcements from the UK retail sector continue to paint a very mixed picture. While companies such as HMV have announced sharp falls in retail sales in recent months, other companies such as John Lewis have announced strong performance over the Christmas period with like-for-like sales up 6.2% over the same period a year ago. Overall, evidence is beginning to emerge of a polarised retail sector, with both the luxury and value ends of the market performing relatively well while mid-market retailers continue to struggle. In addition to the tough consumer environment at present, traditional High Street retailers are struggling with the increasing shift towards internet retail sales, which were 28.4% higher in December 2011 than in December Internet retail sales now account for just under 11% of total sales, up from about 3% five years ago. Businesses that fail to adapt to this technological shift run the risk of gradually seeing their customer base eroded and ultimately failing. Weak consumer demand and structural changes related to the rise of the internet mean we expect insolvencies in the retail and wholesale sector to rise by 4% in 2012, following a 5% rise in Insolvencies are expected to fall back from 2013 onwards, as real household incomes in the UK start to see some recovery and access to credit becomes less tight. 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. Other factors, such as rising alcohol duties, will also make for a challenging environment for the catering industry. We expect insolvencies to rise by 8% this year and by 3% in Figure 14: Output in Distribution, Hotels and Restaurants annual % change. Figure 15: Retail insolvencies in the UK, by year. Figure 16: Hotel and Restaurant insolvencies in Great Britain, by year. Page 12 Page 13

9 Transport, storage and communication Appendix 1 Insolvencies rise as the economy slows. 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 service 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 to business activity. The weak short-term economic backdrop over the coming year means we expect failures in the transport, storage and communication sector to rise by 7% this year and 2% in Failures in the transport sector are expected to gradually decline from 2014 onwards as the economy recovers. Insolvencies in Great Britain, by sector f 2013f 2014f 2015f Manufacturing 2,309 2,997 2,311 2,126 2,188 2,075 1,883 1,676 Construction 3,472 4,596 3,806 4,024 4,577 4,829 4,897 4,882 Wholesale & Retail Trade 3,226 3,688 2,759 2, ,977 2,866 2,728 Hotels & Restaurants 1,267 1,493 1,426 1,574 1,700 1,759 1,782 1,788 Transport Storage & Communications Financial, Real Estate & Business Services 1,100 1, ,696 7,727 6,611 6,922 7,521 7,448 7,021 6,480 Other 4,513 4,589 4,536 5,264 4,692 4,596 4,439 4,289 Total Great Britain 22,583 26,196 22,294 23,634 24,581 24,596 23,790 22,725 Figure 17: Transport, Storage and Communication output annual % change. Annual % change in insolvencies in Great Britain, by sector. Figure 18: Transport, storage and communication insolvencies in Great Britain, by year. Page 14 Page 15

10 About Us In 1906 William Henry Cork established the firm as an insolvency practice largely focused on helping businesses in the grocery trade. After his death and a period of war service, his sons Kenneth and Norman became the owners of the firm and built the business, expanding throughout the 1950s, 1960s and 1970s to become the leading firm 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 re-established the family 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 restructuring, recovery and insolvency services and have worked together as a team for over ten years, finding solutions to complicated restructuring issues. We are an independent firm and therefore less likely to encounter conflicts of interest. 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 Disclaimer The content of this report is for general information purposes only and although Cork Gully has made every effort to ensure the content is accurate and up to date, it should in no way be construed as professional advice. Cork Gully does not accept any responsibility or liability in relation to its use. Users are advised to seek professional advice before taking or refraining from taking any action. Cork Gully makes no warranties or representations. In no event shall Cork Gully, its employees or agents, be liable for any direct, indirect or consequential damages resulting from the use of this report. The Cork Gully report is not used to provide professional services and nothing in it constitutes a binding offer to perform any professional service in any jurisdiction. Users of this report are responsible for obeying all applicable laws relating to the intellectual property rights inherent in this report. Cork Gully permits you to make copies of the content of this report as necessary and incidental to your use of it provided that it is for your personal use, that it is of a reasonable amount for personal use and provided that you do not copy or re-publish it in whole or in part without the express written permission of a partner of the firm. This permission is not guaranteed and may be refused without reason. Any legal action or proceedings arising between any person or organisation and Cork Gully in relation to this report will be governed by English law and under the exclusive jurisdiction of the English courts. Cork Gully LLP ( Cork Gully ) is a limited liability partnership registered in England and Wales. Partnership number OC Registered office 52 Brook Street, London W1G 9DQ. A list of members is available for inspection at the registered office. Page 16 Page 17

11 Contact Sandi Selvey Head of Communications Cork Gully LLP 52 Brook Street, London W1K 5DS Tel: +44 (0) Fax: +44 (0)