Grant Thornton warns that drop in personal insolvencies
is not the turning point
Friday 3 August 2007
- Debt market cools off, but 12 people an hour are still
enter a bankruptcy or an IVA
- Corporate insolvencies drop but contraction in lending
policies likely to cause more casualties
The number of UK personal insolvencies has dropped by 8.1%
on the previous quarter with 26,956 individuals entering into
bankruptcy or an IVA1 (Individual Voluntary Arrangement) during the
second quarter of 2007. Although the drop in insolvencies is
significant in that it follows two years of steady growth, this
quarter's figures are still an increase of 4.2% on the same quarter
last year (25,869). Figures issued today by the Insolvency Service
and analysed by Grant Thornton's Personal Insolvency practice show
a marked decrease in IVAs from 12,597 to 10,698, a 15% drop, but
only a minimal fall in bankruptcies which decreased by 3%.
Commenting on the continuing problem of personal debt, Mike
Gerrard, Head of Personal Insolvency at Grant Thornton, said, "It
may look as if personal insolvencies have finally reached a
plateau, however evidence points to a peak still being someway off.
The existing mountain of debt still stands, consumer spending
remains unabated and there is a strong likelihood of more interest
rate rises, not to mention previous ones still having to filter
through the system, which will cause more individuals to resort to
bankruptcies and IVAs."
Gerrard says there are many factors which force
individuals into seeking a bankruptcy or IVA: "At its most basic
it's about having unmanageable levels of unsecured debt which,
through interest, gets progressively worse. People scramble for a
while to pay it off and more often then not end up throwing in the
towel, overwhelmed by the sheer scale of the problem."
Unexpected increases in the cost of living is all it takes
to tip individuals over the edge. One key factor that has
undoubtedly fuelled personal insolvencies has been the gradual rise
in interest payments on a typical variable rate mortgage as seen
over the past five years.
"In the space of five years, repayments on an average
variable rate mortgage have risen over 65% and it is these frequent
increases that can act as a trigger, making serviceable debt
unmanageable for many people." Gerrard continues, "In 2003 an
individual with an average mortgage of £99,02932 and an interest
rate of 3.75% would have paid £3,713 per annum. Today, with
interest rates at 5.75% and the average mortgage at £140,44732,
costs have risen to £8,075pa, equivalent to 35% of an individual's
average gross earnings3 and an increase of £4,362 since
2003."
"In our experience, many individuals are running up credit
card debts of £60,000 to £70,000 plus - often with interest at 20%
plus. If servicing this debt was not already a tall order, it is
not difficult to see how finding an extra £4,362 a year to service
a mortgage, higher utility bills and taxes are plunging more people
into insolvency. Some increases may be small, but collectively that
is all it takes to tip the balance in insolvency cases," says
Gerrard.
Further evidence that the problem of personal debt is
still a way from being resolved came today from statistics issued
by the Council of Mortgage Lenders. In the first six months of the
year, 14,000 properties were taken into possession, rising by
nearly 18% compared with the previous half-year, and nearly 30%
compared with the first half of 2006.
"While still historically low, house possessions are
decidedly on an upward trend, largely fuelled by more and more
people defaulting on their mortgages because of excessive levels of
unsecured credit they can't manage", said Gerrard.
Mark Allen, Grant Thornton's Head of IVAs, said that
although the amount of IVAs remains a large figure, there has been
a distinct slow down in their growth compared to the previous
quarter: "IVAs have dropped by 15% on the previous quarter and less
than a percent when compared to the same period last year. This can
be partly attributed to a tougher stance being taken by some
creditors and also a slowing down of marketing activity by some of
the larger IVA providers."
However, Allen believes the IVA industry is close to
adopting a fee structure and code of practice which will align fees
of IVA firms to the return to the creditors, increase the payments
to creditors and provide much needed stability to this
industry.
"The establishment of an industry norm will create a
consistency in the market which has not existed before, and ensure
that the debt repayment process involved in an IVA is transparent
and addresses the concerns of creditors, the debtor and the
insolvency practitioner," says Allen.
Corporate insolvencies:
There were 3,032 liquidations in England and Wales in the
second quarter of 2007. This was a decrease of 2.1% on the previous
quarter and a decrease of 4.2% on the same period a year
ago.
Of greater interest is the drop in the number of
administrations, typically involving larger corporate entities,
which for the quarter fell 19% from 699 in Q1 to 565 this quarter.
Q2's administration levels also represent a drop of 13% on the same
quarter last year.
Recent benign economic conditions have certainly played a
key part in seeing corporate insolvency levels fall to their lowest
levels in just over two years (Q1 2005), however, "We don't expect
the downward trend to last," said Simon Longfield, a restructuring
partner in Grant Thornton's Recovery and Reorganisation
department.
"Recent years have seen the fuelling of a restructuring
culture - corporates with labyrinthine debt structures that would
have traditionally forced them out of business being re-financed
and rescued thanks to strong liquidity levels. However, lending
conditions within the UK debt restructuring market are increasingly
contracting with costs rising, lenders beginning to tighten their
covenants and being more risk averse than just a few months
ago."
"With lending conditions showing early signs of tightening it is
inevitable that more corporate insolvencies will follow unless
management teams are quick to react with realignment strategies -
the extent of these will be directly proportional to how radical
and firm this process is set to become," said Longfield.
The UK lending bubble has by no means burst but the
realisation of a starker reality is undoubtedly setting in. "The
market has been awash with covenant light ("cov-lite") loans and
highly leveraged deals led by the private equity community.
What we are witnessing is not yet the turning of the tide but
certainly a realignment of lender policy and strategy which will
make it harder, for many, to restructure their debts," he
continued.
Cost is also a major issue with average lending costs
rising by more than a quarter over the past two years, and by over
60% since 2003.
Commenting on the market in general, Longfield said, "Over
the next year I expect the resolution of restructuring deals to be
more challenging. The likelihood is that a higher proportion
of debts will not be re-financed on terms similar to those
experienced in the last couple of years, adding to the likelihood
of more corporate insolvencies. I expect retail businesses
and bars and restaurants to feature at the sharp end, mainly as a
result of the economic effects caused by the recent and protracted
bad weather and to the effects of continuing pressures on consumer
spending levels."