Casualties of the recession: insolvencies by industry Corporate insolvencies reached record levels during 2008 and as the recession claimed businesses in every industry. In order to establish which industries have suffered most, R3 has tracked the total number of insolvencies in each industry in England and Wales throughout the recession, and has compared the numbers of insolvencies in each industry with the number of enterprises within them before the recession began. Our report concludes with a look at overall insolvency trends from previous recessions. Executive summary The real estate, renting and business activities industry experienced far more insolvencies than any other industry during the recession (12,050 insolvencies). The construction industry, and the wholesale and retail industry have also experienced very high levels of insolvencies (at 7,184 and 6,077 respectively), followed relatively closely by the manufacturing industry (4,664). In most key industries, the peak of insolvencies occurred in the first quarter of. A notable exception is the real estate industry, which experienced a peak in the last quarter of 2008; which is perhaps unsurprising given that the economic crisis began in this industry. The number of insolvencies as a proportion of the total number of enterprises stands at between 0.1% and 1.7% in each industry. The similarity in figures indicates that the pain of the recession has been fairly evenly spread, although clearly some industries have experienced more insolvencies as a proportion of the number of enterprises than others. The hotels and restaurants industry, for example, appears to have been worst affected, with 1.7% of enterprises - close to two in every hundred - becoming insolvent during the recession. The manufacturing industry follows close behind, at 1.6%. Figures from the 1980s and the 1990s recessions suggest that insolvencies continue to rise after a recession officially ends, culminating in an eventual peak some time afterwards. In the early 1990s recession, for example, the peak in corporate liquidations was recorded five quarters (18 months) after the return to growth. Although the 2008/9 recession has exhibited certain unique characteristics, Insolvency Practitioners still expect to see an insolvency lag. Even though businesses in many industries have suffered throughout the duration of the most recent recession, the worst may in fact be yet to come as the recession s aftermath continues to take its toll on weakened businesses.
Section 1 Which industries have experienced the highest number of insolvencies? The real estate, renting and business activities industry experienced far more insolvencies than any other industry during the recession, with 12,050 insolvencies from the second quarter 2008 to the end of the fourth quarter. The construction industry and the wholesale and retail industry have also experienced very high levels of insolvencies - at 7,184 and 6,077 respectively - followed relatively closely by the manufacturing industry (4,664). The following chart shows the number of insolvencies experienced by each of the main industries during the recession: R3 President Steven Law interprets the results... Real estate The real estate sector experienced a far greater number of insolvencies during the period of recession than any other industry, with over 12,000 insolvencies over this period. Due to the availability of credit, many speculative building and development projects took place in the period leading up to the recession, which resulted in over-supply when the recession took hold. When the credit crunch began to bite, it became more difficult to get a mortgage and consumer spending declined. People and businesses were less inclined to move, leaving the real estate companies that had commissioned development projects unable to sell the property on flats, houses, shops and office developments remained empty. As creditors started to recover the money these companies had borrowed to help cover the costs of developments, many real estate companies fell into formal insolvency. As in most recessions, the real estate industry was the key industry to be hit first by the credit crunch - indicated by its insolvency peak occurring a quarter earlier than the other main sectors and its demise, in turn, went on to affect other key industries. The sheer size of the sector may also go some way to explaining the extreme levels of insolvencies it experienced. The real estate sector contained far more enterprises than any other before the recession began with over one million enterprises, compared to just over 500,000 in the wholesale and retail industry, for example - which provides a degree of context. Casualties of the recession: insolvencies by industry page 2 of 7
R3 President Steven Law interprets the results... Construction The construction industry experienced high levels of insolvencies during the recession, with the second highest insolvency level of all industries (7,184 insolvencies). The construction industry s fate was inextricably linked to that of the real estate sector and it was deeply affected by the ripple effect of the downturn in the real estate sector. Before the recession, construction boomed in significant part because of the number and scale of projects commissioned by companies in the real estate sector - office developments, blocks of flats etc. The number of companies in the sector was very high, at just under one million enterprises. When the building work dried up as the real estate sector suffered, there were too many companies competing for the construction work available and many construction companies became insolvent. Some companies tried to hold on by undercutting competitors prices when tendering for work, even to the point of bidding at a loss but this was unsustainable as the recession wore on. In short, the construction industry naturally contracted as the building work which had been plentiful before the recession, dried up. Although many public sector construction projects were continued during the recession, whether the Government s budget cuts will enforce fresh constraints on the construction industry remains to be seen. Wholesale and retail The wholesale and retail industry experienced a considerable number of insolvencies during the recession, with the third highest insolvency level of all industries (6,077 insolvencies). The retail industry is traditionally vulnerable in challenging economic times given its dependence on consumer spend As recessions take hold, saving becomes more attractive, people start to tighten their belts and cut back on non-essential spending. Industries, like retail, that are reliant on consumer spending see a reduced demand and can slip into insolvency which, in turn, affects their suppliers - wholesalers, and eventually, manufacturers. Section 2 Insolvencies as a proportion of total number of enterprises in each industry The chart below shows the total number of enterprises in each industry at the start of 2008 to the number of insolvencies that have occurred within them during the recession. The number of insolvencies as a proportion of the total number of enterprises stands at between 0.1% and 1.7% in each industry. The similarity in figures indicates that the pain of the recession has been fairly evenly spread, although clearly some industries have experienced more insolvencies as a proportion of the number of enterprises than others. The hotels and restaurants industry appears to have been worst affected, with 1.7% of enterprises - close to two in every hundred - becoming insolvent during the recession. The manufacturing industry follows close behind, at 1.6%. Casualties of the recession: insolvencies by industry page 3 of 7
Some industries contained more enterprises than others before the recession began, so the number of insolvencies as a proportion of enterprises is much smaller; likewise, certain industries had fewer enterprises to begin with, and therefore the effect of insolvencies through the recession is proportionately greater. For example, while the real estate industry experienced the greater number of insolvencies, the industry experienced a smaller proportion of insolvencies to number of enterprises than many other industries (1.1%) because there were such a large number of real estate enterprises before the recession (there were 1,114,475 real estate enterprises at the start of 2008, compared to just 145,805 hotels and restaurants). The construction industry exhibits a similar trend to real estate, with the industry experiencing the second highest numbers of insolvencies, but the seventh highest insolvencies as a proportion of number of enterprises. N.B. The industry classifications for the number of enterprises (held by the Department for Business Innovation and Skills) differ slightly to those used to classify insolvency procedures by industry (held by the Insolvency Service), so certain categories have been combined or removed from the analysis, e.g. in the Insovlency Service, Agriculture, Hunting and Forestry is a distinct category from Fishing; while under the classifications used by the Department for Business Innovation and Skills for the total number of enterprises they have been merged; and while the Insovlency Service have a category termed Extra-territorial organisations and bodies, the classifications used by the Department for Business Innovation and Skills for the total number of enterprises do not include this as a category. R3 President Steven Law interprets the results... Hotels and restaurants The hotels and restaurant industry also experienced a proportionately significant number of insolvencies (at 2,448) given that the number of enterprises within the industry was significantly smaller than others before the recession began (at just 145,805 enterprises). Like the wholesale and retail industry, the hotels and restaurants industry tends to be vulnerable because of its dependence on consumer spend. They also suffered in the recession because of a lower demand from businesses due to reduced activity and cost cutting on, for example, conference spend. Manufacturing The manufacturing industry was fairly small before the recession began (with 299,445 enterprises at the start of 2008). It then suffered a significant number of insolvencies during the recession (4664 insolvencies; the fourth highest level of all industries). The comparative effect on the industry was therefore considerable. As consumer spending dried up and construction projects faded, there was a consequent decline in demand for products; in addition, many businesses resorted to de-stocking - selling what the stock they already had rather than buying new products. Fortunately for the businesses in the industry, manufacturing is traditionally one of the first industries to start recovering when economic growth returns as the effects of a rise in demand and re-stocking are quickly felt. The weaker pound at present should also provide a fillip for manufactures who sell their products abroad, as these goods become more competitively priced for buyers. Section 3 Insolvency peaks for each industry In the industries that have experienced the highest number or greatest proportion of insolvencies, the peak of insolvencies occurred in the first quarter of (highlighted in yellow in the table below). A key exception is the real estate industry, which experienced a peak in the last quarter of 2008. Total number of insolvencies Industry (by Government category) Q2 2008 Q3 2008 Q4 2008 Q1 Q2 Q3 Q4 Construction 784 883 1014 1209 1199 1070 1025 Hotels and restaurants 302 344 347 413 357 313 372 Manufacturing 546 572 626 811 786 705 618 Real estate, renting and business activities 1191 1473 2339 1799 1807 1774 1667 Wholesale 774 740 941 1084 919 831 788 and retail Yellow highlight = peak in insolvencies Casualties of the recession: insolvencies by industry page 4 of 7
Section 4 Previous recessions Figures from the 1980s and the 1990s recessions suggest that insolvencies continue to rise after a recession officially ends, culminating in a peak some time afterwards. In the early 1990s recession, for example, the peak in corporate liquidations was recorded five quarters (18 months) after the return to growth. The insolvency lag is a result of two key factors: creditors tend to become more aggressive when the financial situation starts to improve because they stand to achieve greater returns; even though the economy begins to pick up, many businesses will have drawn heavily on their reserves to help them stay afloat thus far, but fighting a rearguard action for so long leaves them without the reserves they need to grow, and damages their prospects for obtaining funding. Although this recession has exhibited certain unique characteristics, Insolvency Practitioners expect the insolvency lag to follow the period of official recession. So even though businesses in many industries have suffered throughout the recession, the worst may in fact be yet to come as its aftermath continues to take its toll on weakened businesses. R3 President Steven Law explains the insolvency lag : The lag is most simply explained by the fact that it takes time before any return to growth is translated into tangible relief for business owners and individuals. Though the overall economic outlook may be brighter, it is usually some time before creditors begin to extend credit at pre-recession levels or before employment and spending pick up. Casualties of the recession: insolvencies by industry page 5 of 7
Appendix Insolvencies through the recession: industry by industry, quarter by quarter The table below shows the numbers of insolvencies in each industry during each quarter of the recession. The figures are calculated by adding together Insolvency Service figures for the numbers of administrations, CVLs, compulsory liquidations, CVAs and receiverships in each industry during each quarter (from the second quarter of 2008, through to the end of - the period of recession). Total number of insolvencies Industry (by Government category) Q2 2008 Q3 2008 Q4 2008 Q1 Q2 Q3 Q4 Agriculture, hunting and forestry 22 21 19 24 23 24 18 Construction 784 883 1014 1209 1199 1070 1025 Education 37 32 33 32 33 44 43 Electricity, gas and water supply 12 11 23 13 25 11 7 Extra-territorial organisations and bodies 2 1 2 1 3 1 1 Financial intermediation 70 106 139 107 139 93 105 Fishing 5 5 2 2 2 1 2 Health and social work 47 45 44 50 54 60 53 Hotels and restaurants 302 344 347 413 357 313 372 Manufacturing 546 572 626 811 786 705 618 Mining and quarrying 3 8 11 7 5 7 9 Other 705 755 747 694 656 604 594 Other community, social and personal service activities Private households employing staff and undifferentiated production activities Public administration and defence; compulsory social security Real estate, renting and business activities 243 340 333 381 371 335 319 3 2 3 6 4 2 6 8 9 9 5 10 12 6 1191 1473 2339 1799 1807 1774 1667 Transport, storage and communication 247 288 319 299 273 254 278 Wholesale and retail 774 740 941 1084 919 831 788 Casualties of the recession: insolvencies by industry page 6 of 7
Appendix Insolvencies compared to number of enterprises in each industry The table below shows an indication of the numbers of insolvencies in each industry during the recession compared to the total number of businesses within it at the start of 2008. Name of sector (Insolvency Service categories for insolvencies within each industry) Total number of enterprises in England and Wales as listed in March 2008 Total number of insolvencies in England and Wales, by sector during the recession (Q2 2008 to Q4 ) Approximate percentage of insolvencies to total number of enterprises Hotels + restaurants 145,805 2448 1.7 Manufacturing 299,445 4664 1.6 Mining and Quarrying; Electricity, Gas and Water Supply 11,135 152 1.4 Wholesale and Retail 528,325 6077 1.2 Financial Intermediation 68,985 759 1.1 Real Estate 1,114,475 12050 1.1 Construction 910,550 7184 0.8 Transport, Storage + Communication Other Community, Social and Personal Service 268,945 1958 0.7 461,955 2322 0.5 Education 156,470 254 0.2 Health and Social work 235,010 353 0.2 Agriculture, Hunting and Forestry; Fishing 133,395 170 0.1 Methodology note R3 has tracked the number of insolvencies throughout the recession in each of the main industries in England and Wales. The figures are calculated by adding together Insolvency Service figures for the numbers of administrations, CVLs, compulsory liquidations, CVAs and receiverships in each industry from the second quarter of 2008, through to the end of (the period of recession). During this time, some companies may have moved from one insolvency procedure to another (e.g. from a receivership into liquidation) so there may be instances where a company is counted twice - we believe these instances are very low in number and unlikely to affect overall trends. About R3 R3, the trade body for Insolvency Professionals, represents over 97% of Insolvency Practitioners. R3 members are trained and regulated accountants and lawyers who have extensive experience of helping businesses and individuals in financial distress. Casualties of the recession: insolvencies by industry page 7 of 7