Another storm on the horizon? has been saved
Another storm on the horizon?
The outlook for corporate insolvencies in 2021
UK Government support measures are likely to have depressed corporate insolvencies in Q2 and Q3 2020, leading to a backlog. We expect corporate insolvencies could be much higher in the first half of 2021 compared with previous years. They could potentially be even higher than the average 60% increase experienced at the height of the global financial crisis in 2009. Automotive, retail and food service are expected to be the most impacted.
What’s the picture right now?
As we have entered a second lock down period across large parts of the UK, and the associated restrictions continue to negatively impact the economy, it would seem logical that the number of companies becoming insolvent would have risen sharply. However, counter to this, the latest Insolvency Service data shows insolvencies in England and Wales in Q2 and Q3 2020 were at historical lows.
Source: Insolvency Service, Company Insolvency Statistics, https://www.gov.uk/government/collections/company-insolvency-statistics-releases
Why is this?
The COVID-19 crisis has seen unprecedented measures, from the UK Government, to support companies and their employees through schemes such as CBILs/CLBILs/Bounce Back Loans, furlough, rates relief and the deferral of VAT. As importantly, protection has also been provided through restrictions on statutory demands, winding up petitions and the issuing of winding up orders, which are currently in place until 31 December 2020. This has provided protection for many corporates from key creditors with overdue arrears, such as landlords. The relaxation of the wrongful trading provision was also brought in, although that support measure has now expired.
All of this has ensured the survival of many companies, which was largely the aim of the measures. However, the recent data suggests this is not just the survival of companies directly impacted by COVID-19, but perhaps some that would most likely have failed even in a normal economic climate.
What happens when Government support ends?
Most of the UK Government measures are temporary and therefore, as they unwind, the number of insolvencies should be expected to rise sharply, driven by the two fold impact of:
- The economic crisis; and
- A backlog of “normal run-rate” insolvencies from Q2 and Q3 this year.
Of course, the outlook is incredibly uncertain at this time, and the impact of the crisis varies enormously across the economy. Some sectors have been severely hit, others less so. Furthermore, the various UK Government support measures have already been detailed to unwind at different times (e.g. CLBILs repayment within three years, cessation of rates relief – 31 March 2021, expiry of winding up protections – 31 December 2020), but the protections may be extended again. This has recently been seen with furlough support extended to March 2021. In order to consider the potential future impact of support measures unwinding, we have looked at the extent to which insolvencies could increase during H1 2021. Bear in mind, however, that the timing of this increase is not fixed.
How have we assessed this?
There are two key factors which have informed our projection for an increase in corporate insolvencies in H1 2021:
- Backlog: The depressed numbers since Q2 2020 will likely represent a backlog of insolvencies of businesses who would otherwise have failed, but have been artificially kept solvent due to the COVID-19 support measures. These individual businesses are unlikely to have fundamentally improved. We have modelled this backlog unwinding through H1 2021. Note: this timing could change as the UK Government’s response to the ongoing crisis and latest lockdown evolves.
- Economic Downturn: Despite the UK Government support measures, COVID-19 has led to one of the biggest economic downturns on record. GDP is expected to fall by around 12% this year, according to Deloitte’s latest central outlook for the UK economy. This, in turn, can be expected to produce a sharp rise in company failures. We have compared the latest projections for H1 2021 to the historical relationship between economic downturns and company failures, in order to estimate a resulting additional rise in insolvencies. Note: we assume the current lockdown either ends on 2 Dec as planned or even in mid-January, giving a range for the economic ‘downside’.
What does this show across the sectors?
The chart below shows the projected percentage increase in insolvencies in H1 2021 on a sector by sector basis and the impact of the Global Financial Crisis (“GFC”) in 2009 as a comparison.
Notes: The chart shows the projected increase in insolvencies in H1 2021 compared to the ‘normal’ level for the first half of the year, based on the experience of the previous two years. The line shows the increase observed in 2009, the peak year for insolvencies during the global financial crisis, compared to the pre-crisis level at that time. Retail insolvencies in H1 2021 could be 80-100% more than the average for the last few years. During the GFC the increase was 50% compared to the average of the previous two years.
The sectors can be broadly grouped into three categories:
- Those sectors hit hardest by the current economic climate, due to the impact of lockdown measures and loss of demand e.g. Automotive, retail, accommodation and food service. According to the projections, these sectors could see more than double the number of insolvencies.
- Those sectors which have been comparatively less affected in more traditional financial led crises e.g. financial services and construction.
- Those sectors that are more insulated from the current economic crisis, e.g. utilities, where the projected increase in insolvencies is mainly driven by the backlog in 2020.
Where are the key areas to watch?
Automotive: Significant disruption is expected throughout the automotive supply chain, as end consumer demand reduces as COVID-19 impacts consumer income and appetite for investment in non-essential goods. September YTD car registrations were down 33% compared with 2019, whilst UK car production has fallen by 46% from its peak in March 20171. Further, the automotive industry and its intricate supply chain is expected to be disproportionately impacted by changes to cross-border trading post-Brexit, generating further stress in the sector.
Retail: The moratorium on landlord enforcement action introduced by the UK Government in response to the COVID-19 pandemic, as already referenced, has helped a significant number of retailers survive through 2020. However, property lease liabilities have continued to accrue, which will create additional pressure on the sector, if and when the moratorium ends. Rent data collection for the last three quarters show only 54% (March 2020), 48% (June 2020) and 60% (September 2020)2 of the amounts due were paid within 21 days, highlighting the scale of the arrears being built up.
Further, the timing of the second national UK lockdown, comes at the critical pre-Christmas trading period, when many retailers make the majority of their profit and generate the cash required to survive quieter periods
Food Service: Many restaurant operators did not reopen their full portfolio of sites following the first national UK lockdown, particularly in travel hubs and city centres. The second national UK lockdown will not only further delay recovery but, as with retail, will reduce the ability to trade in the run up to Christmas. This revenue will never be recovered. Changing consumer behaviours and footfall patterns are expected to create further pressure on the sector, which will be compounded by the unwinding of furlough and landlord moratorium measures. Whilst ‘Eat Out To Help Out’ provided a short term boost, café, restaurant and fast-food sales were still down an average of 35% year on year in August3.
What does this all mean?
Our team continues to support our clients through the COVID-19 pandemic – the latest statistics from the Insolvency Service mask the level of corporate distress we are expecting and preparing to see in H1 2021. We anticipate increased market activity as UK Government intervention measures unwind and the longer term impact of COVID-19 on the UK economic outlook takes hold. Our clients can look to our expertise, through what is expected to be a challenging period for us all.
1 Source: SMMT
2 Source: REMark 2020: September Quarter Day – 21 Day Analysis
3 Source: Beauclair