Corporate Insolvencies steady but credit crunch about to bite
Grant Thornton Recovery and Reorganisation Partner Malcolm Shierson says the slight increase in corporate insolvencies was the prelude to a much more difficult year in 2008.
“We now expect the number of corporate insolvencies to increase by 10-15% in 2008, as many of the credit arrangements offering life support to ailing companies have almost disappeared. It is increasingly unlikely that there will be a quick return to business as usual.”
According to the Government’s Insolvency Service, there were 3,135 liquidations in England and Wales in the final quarter of 2007, an increase of 0.3% on the previous quarter, and a slight decrease (2.1%) on the same period a year ago. The number of companies in administration, typically involving larger corporate entities, increased by 10% on the previous quarter, from 506 in Q3 to 557.
According to Shierson present conditions have resulted in two key options for securing credit becoming much more difficult to secure.
In the first instance, many lenders are now finding themselves unable to sell on debt, which had until very recently been used widely to exit from distressed situations. But there has been a marked breakdown in trust between the buyers and sellers of debt during the past four months.
The other area that has tightened up markedly is refinancing, particularly for those businesses without a strong relationship with their lender. In fact, many traditional lenders are now focusing largely on clients they know well, rather than taking the refinancing risks they may have afforded themselves even six months ago.
“Using these tools to offload problems has kept many businesses afloat in boom time, but now that the wheel of revolving finance has stopped spinning, many businesses are having to face up to underlying problems, rather than borrowing them away.”
Shierson said it is also of concern that the Bank of England adjusting interest rates may not have the desired flow on effect to the cost of debt, as lenders had begun to price credit on risk alone rather than base plus risk. Coupled with the massive adjustment in commercial property prices, it seems the outlook is bleak.
“Many businesses are hoping to simply ride out the credit crunch, but it is now clear the wait-and-see approach is not sustainable. If a company is experiencing difficulties operating within facility limits, the time to act is now.”
