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."