Insolvency Vulnerabilities in a Permacrisis, by Greg Connell, Managing Director of InfolinkGazette.
The Bank of England (BOE) outlined two variants of the same economic outlook for the UK economy on Thursday, 3 November 2022. One was gloomy, and the second was gloomier still, and in either scenario, the BOE said the UK economy was slipping into a recession that would last throughout 2024. Gross domestic product (GDP) is already estimated to have fallen by 0.3% in August 2022, after growth of 0.1% in July 2022 (revised down from growth of 0.2%). The August number will probably be revised next month, but it is just as likely to go down as up. There has been a continued slowing in the quarterly trend, with GDP falling by 0.3% in the three months to August compared with the three months to May 2022.
At InfolinkGazette, our mission is to be the first to publish pre-insolvency events that enable our customers to know which companies have the greatest vulnerability to an imminent insolvency, and we tend to be at the sharp end of any deterioration in the economy and begin to see increases in the number of companies that have become vulnerable to Insolvency. Conversely, we are at the tail end of any economic recovery because the number of companies demonstrating vulnerability to insolvency remains high for some time after a recession comes to an end. The trends on all event types that demonstrate a vulnerability to insolvency have currently turned negative and we can see a recession coming.
Based on the data and events where we have comprehensive coverage, we expect to see at least a two-quarter technical recession in the UK with negative growth in Q3 2022 and Q4 2022.
Debtor-initiated pre-insolvency events filed in HM Courts have been low for most of 2022.
The March 2022 spike in debtor-initiated pre-insolvency event filings, such as Notice of Intention to appoint an administrator and moratoriums was in response to the ending of all the restrictions on landlord enforcements introduced in March 2020 and lapsed on 25 March 2022. Beyond the spike, we see the trend increasing, at least until the end of March 2023, and 93% of these pre-insolvency events translate into a formal insolvency.
Creditors are not showing anything like the same reticence as debtors, and the creditor-initiated pre-insolvency event filing, such as the Initial Stage Winding up petition applications have yet to peak.
We see Initial Stage Winding Up Petitions (WUPAs) trending upwards at least until March 2023, although the explosive exponential growth phase is probably coming to an end. 60% of WUPAs translate into a formal insolvency event within 90 days.
We may have seen peak LSE Profit Warning volumes in September at 45 but the trend remains up with listed companies reporting difficulties caused by soaring inflation, energy expenses doubling, ongoing supply chain constraints, and the war in Ukraine.
As was recently the case with digital lifestyle brand Made.com Group Plc, 4 profit warnings in the space of 12 months or multiple profit warnings over a two-year period creates an extremely high vulnerability to insolvency.
As the volume of insolvencies increase, so does the number of unsecured creditors, losing money when one of their customers goes out of business.
Unsecured creditors in turn also face an increased vulnerability to insolvency because not only are they facing an unexpected hit to cash flow when their customer becomes insolvent and can’t pay what they already owe, but they take a hit to future cash flows because of lost business. Even those companies that are covered by trade credit insurance can run into difficulties, especially if they have significant finance and lease commitments, which can put pressure on cashflow when there is a lull in utilisation of the financed assets.
Projections on the length and depth of the upcoming recession are always going to be based on assumptions for unknowns, such as the price of gas when winter fuel stocks are being secured in the summer of 2023 and how severely consumers respond to the cost-of-living crisis. We make no forecasts for how long the recession will last, but we are at the beginning of a recession and these will be testing times for risk management professionals. Some companies that looked to be in good financial health based on the last accounts filed at Companies House are going to become vulnerable to insolvency very quickly and well before the next set of accounts are filed. Risk managers relying on old financials might miss signs of vulnerability.