In a conversation with a senior risk underwriter at one of the UK’s leading credit insurers at the start of the year, I was told that the projection for UK insolvencies as a whole throughout 2012 was that they would plateau out at an even level and that that level would be around 30% higher than pre-credit crunch.
The insolvency stats released on Friday 2nd November show a 2.8% drop on the previous quarter and a 6.8% drop on the same quarter a year ago – if you look at a rough average, company liquidations are running at 4,200 per quarter from Q1 2010 to Q3 2012; this compares to roughly 3,250 per quarter from 2004 to Q2 2008 (there was a spike between Q2 2008 and Q1 2010) – roughly a 29% increase between the two periods. I guess that +29% actual against +30% projection isn’t too bad a forecast! As ever with these statistics, it’s not about what’s happened, but about what is going to happen and there are still plenty of grounds for concern.
Recent conversations with senior risk underwriters have flagged up a few ‘Zombie companies’ – the hot topic! Companies that are generating enough cash to service current debt levels, but which don’t look in good shape to survive any increase in debt costs or any slight change in trading circumstances. Begbies Traynor produce a quarterly “Red Flag Alert” report which looks ahead at the risks facing businesses. Julie Palmer, Partner at Begbies Traynor “Unfortunately the outlook for many of these SME’s is poor. These zombie companies are only just generating sufficient cash to pay the interest on their debts and keep creditors at bay. Whilst many of these SMEs may survive with the benefit of low interest rates and creditor forbearance, they are in no position to deal with unexpected costs, lost orders or bad debts or to fund increases in working capital and invest in growth”
Private equity exit plans – many private equity backed M&A activity is based on a 5 – 7 year turnaround. There was a considerable level of activity in the mid 2000’s and the “sell by” date on those deals has now come. If companies that are currently trading reasonably are sold on, the new ownership structure will need to be carefully considered if the same lines of trade credit (whether insured or not) are to be maintained.Asset revaluation – balance sheets may start taking hits as stock / fixed assets are reassessed in the current market conditions.
Commercial property in particular is tough to value and significant downgrades of asset valuations may in turn put pressure on finance covenants.
However, there remain many successful companies and all businesses need to continue to trade to survive and trade credit remains a key component of the sales proposition. It’s just that the risk associated with the provision of trade credit is currently 30% higher than it was 5 years ago. As for the risk associated with the provision of trade credit in 2013, I don’t know, I haven’t had that conversation yet.