Corporate insolvencies at lowest level in four years
Corporate insolvencies at lowest level in four years
Government measures transform usual economic and insolvency relationship
- Government measures transform usual economic and insolvency relationship
- Distress reflects a Covid-19 pattern
- Uptick in administrations throughout Q2
- Dramatically different data expected in Q3
Corporate insolvencies dropped to the lowest point since 2016*, with 274 companies in the UK entering administration in the second quarter of 2020, according to analysis of notices in The Gazette by KPMG’s Restructuring practice. This represents a 28 percent fall from the year’s first three months.
The quarter was almost entirely a period of lockdown, with plummeting consumer spending and largely overlapping with a GDP fall of 19 percent (March-May ONS estimate).
Blair Nimmo, head of Restructuring at KPMG in the UK, comments: “Clearly government measures have had a dramatic impact. The effect of putting parts of the private sector into a quarter of virtual hibernation has not just severed the link between a fall in economic activity and a rise in corporate insolvency, it has flipped it on its head.
“Nonetheless, the picture of distress painted by the insolvency data is markedly COVID-19 shaped. Administrations in healthcare have dropped by 64 percent, a far greater extent than other sectors. This fall is only exceeded by that in the technology sector, in which administrations fell by 71 percent. This perhaps reflects the lockdown related growth in reliance on technology by consumers and businesses alike, putting tech more firmly than ever at the heart of many business’ operating models.
“Conversely, passenger transport, which broadly refers to coach operators, is one of the few sectors to see a rise in insolvencies, of 67 percent, highlighting that even the government measures could not give sufficient headroom to some companies that were dependent on our ability to travel.
“The severity of the poor financial health of some in retail and casual dining is not reflected in these figures. These sectors were struggling pre-COVID-19 and what you have seen since the easing of lockdown as they emerge from hibernation is a raft of closures, CVA proposals and administrations. These are likely to continue and indeed accelerate as some of the Government support schemes wind down.”
A dramatic rise in insolvency numbers should be expected in the coming quarter, says Blair Nimmo looking ahead to the challenges facing business:
“Businesses are emerging into a quite different landscape. They may be required to navigate unforgiving territory, combining the withdrawal of government support, local lockdowns, consumer caution and shrinking margins due to new health and safety regimes and reduced productivity.
“The months ahead will see real pressure on cash flow as a consequence of the working capital demands of re-opening, whilst at the same time servicing and repaying new bank facilities, repaying tax arrears and the costs of any required redundancies. The need to focus on building financial resilience and maintaining liquidity cannot be overstated.
“Managing a ramp-up in business activity in such an uncertain economic environment will be one of the biggest challenges many directors have ever faced. Understanding the cash and timing impact of business decisions may prove critical. Knowing the levers that are available and how to prioritise them will be a key feature of robust business planning.”
Blair Nimmo concluded: “Given this outlook, the Q3 insolvency data could tell quite a different story. However, the most significant change to insolvency legislation in nearly two decades came into effect at the end of June. These provisions - including a new moratorium process providing breathing space from creditor pressure and temporary changes to certain director requirements - may help some businesses find a solvent solution to their financial challenges, avoiding the need to enter administration or liquidation.”
Notes to editor
*The most recent quarter with a lower volume of administrations than Q2 2020 was Q1 2016 when there were 266 administrations.
**CVA data for Q2 2020 not yet available.
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