WAVE OF IN­SOL­VEN­CIES LOOMS

A drop in com­pa­nies wind­ing up dur­ing the sum­mer is likely to prove tem­po­rary as un­cer­tainty mounts up, writes Michael O’Dwyer

The Daily Telegraph - Business - - Front Page -

Afresh tight­en­ing of coro­n­avirus re­stric­tions threat­ens to force busi­nesses back into hi­ber­na­tion just as some were be­gin­ning to see light at the end of the Covid tun­nel. By con­trast, bankers spe­cial­is­ing in re­struc­tur­ing strug­gling com­pa­nies have been so busy they are call­ing their old bosses out of re­tire­ment.

“You’re see­ing a lot of old friends who dis­ap­peared in 2012 sud­denly reap­pear again on the screen say­ing hello,” says Jo Wind­sor, an in­sol­vency lawyer at Lin­klaters. “A lot of the old hands are be­ing pulled back in by the larger banks and in­sti­tu­tions.”

So far, the huge wave of in­sol­ven­cies pre­dicted ear­lier in the cri­sis has not ar­rived. Gov­ern­ment sup­port for the pri­vate sec­tor in the form of fur­lough­ing, state-backed loans, busi­ness rates hol­i­days, grants and tax de­fer­rals has staved off a surge in firms go­ing bust.

Of­fi­cial fig­ures re­leased last week showed that the num­ber of com­pany in­sol­ven­cies in Au­gust was 43pc lower than in the same month in 2019.

In a health warn­ing ac­com­pa­ny­ing the fig­ures, the In­sol­vency Ser­vice said that fac­tors such as a tem­po­rary ban on wind­ing-up pe­ti­tions were likely to be driv­ing the low num­ber of busi­nesses go­ing un­der, de­spite the wider eco­nomic dam­age caused by the Covid pan­demic. “The stim­u­lus and sup­port is def­i­nitely do­ing its job in avoid­ing a tsunami of un­nec­es­sary or un­planned cor­po­rate chal­lenges,” says Ge­off Row­ley, chief ex­ec­u­tive of FRP Ad­vi­sory, the re­struc­tur­ing firm which has won work on the ad­min­is­tra­tions of Deben­hams, Bon­marché and Car­luc­cio’s.

The dearth of for­mal com­pany in­sol­ven­cies is mask­ing the pain firms are al­ready en­dur­ing. That could change very quickly, with the state due to stop pay­ing the wages of fur­loughed work­ers at the end of Oc­to­ber.

Lim­its on groups so­cial­is­ing un­der the “rule of six”, re­gional coro­n­avirus re­stric­tions and the threat of a sec­ond na­tional lock­down will make it even tougher for busi­nesses on the brink to avoid the worst. “I think there will be a spike in for­mal in­sol­ven­cies towards the back-end of this year among those busi­nesses which have been hold­ing on and can’t carry on, [and] a grad­ual in­crease in for­mal in­sol­ven­cies over the next two years,” says Carl Jackson, chief ex­ec­u­tive of Quan­tuma, a re­struc­tur­ing firm.

Ad­vis­ers say they are al­ready ex­tremely busy help­ing firms with “in­for­mal” re­struc­tur­ing through ne­go­ti­a­tions with land­lords, cut­ting jobs and other mea­sures to cut costs.

The will­ing­ness of banks and other cred­i­tors to take a prag­matic ap­proach to com­pa­nies that owe them money has so far helped avoid fur­ther cor­po­rate de­struc­tion.

For now, many cred­i­tors be­lieve they will re­cover more of the money they are owed if they al­low com­pa­nies to keep trad­ing, rather than push­ing them over the edge into in­sol­vency and be­ing at the back of the queue wait­ing for re­pay­ment, ex­perts say.

An abun­dance of pri­vate cap­i­tal has al­lowed large firms from Com­pass Group, the caterer, to In­forma, the ex­hi­bi­tion or­gan­iser, to tap eq­uity mar­kets and raise debt to bol­ster their bal­ance sheets. “There seems still to be new money around,” says Wind­sor.

By con­trast, SMEs with­out ac­cess to eq­uity and bond mar­kets could strug­gle more im­me­di­ately, par­tic­u­larly as the bounce­back loan scheme, where bor­row­ing is fully guar­an­teed by the Trea­sury, is set to close to new lend­ing on Nov 4.

Busi­ness lobby groups have called re­peat­edly for fur­ther sup­port from the pub­lic sec­tor to help avoid a cliff edge when the fur­lough scheme is wound down at the end of Oc­to­ber.

More than 1.7m re­tail and hos­pi­tal­ity work­ers were still fur­loughed at the end of July. There is spec­u­la­tion that Rishi Su­nak, the Chan­cel­lor, will ex­tend wage sup­port for the hard­est hit sec­tors, which could also in­clude leisure and travel. “We would prob­a­bly have a rea­son­able ex­pec­ta­tion that gov­ern­ment might look to do some­thing very tar­geted but it is dif­fi­cult to con­clude that they will just ex­tend that for all com­pa­nies,” says Row­ley.

De­lay­ing the Oc­to­ber cut-off would be wel­comed by em­ploy­ees who risk los­ing their in­come, but may not be enough to save busi­nesses that still can­not get back up and run­ning due to so­cial dis­tanc­ing mea­sures.

While re­dun­dan­cies cut over­heads, the up-front cost of pay­ing re­dun­dancy pack­ages could be enough to send some firms to the wall be­fore they can reap the ben­e­fits.

“Say you’re in man­u­fac­tur­ing and have been in ex­is­tence for decades and you’ve got a re­ally loyal work­force – if you start get­ting into the ter­ri­tory of peo­ple be­ing with you for 10 years or so, mak­ing any one per­son re­dun­dant can cost you tens of thou­sands of pounds,” ex­plains Row­ley.

Sup­port has al­ready been ex­tended in the rental mar­ket. Last week, the Gov­ern­ment ex­tended un­til the end of the year its tem­po­rary ban on land­lords evict­ing busi­nesses for fail­ing to pay rent dur­ing the pan­demic. Re­stric­tions on land­lords re­cov­er­ing ar­rears from com­mer­cial ten­ants will also be ex­tended.

Shops, pubs and restau­rants wel­comed the move but Row­ley warns it may sim­ply store up more prob­lems: “All that does at one level is just de­fer the prob­lem once more be­cause the mora­to­rium is not in any way stop­ping that li­a­bil­ity in­creas­ing.”

In the mean­time, land­lords claim com­pa­nies such as Boots or JD Sports

‘There will be a spike in for­mal in­sol­ven­cies towards the back-end of this year among busi­nesses hold­ing on’

will take ad­van­tage of the rules, even if they can af­ford to pay on time.

“It is de­bat­able that ex­tend­ing the evic­tion mora­to­rium is the right an­swer for the leisure and hos­pi­tal­ity sec­tor,” says Chris­tian Mole, head of leisure and hos­pi­tal­ity at EY.

“A con­tin­u­ing in­abil­ity to col­lect rent will in­evitably have a less vis­i­ble but still marked ad­verse im­pact on land­lords, real es­tate funds, and even­tu­ally pri­vate in­vestors and savers.”

Calls from com­pa­nies for the Chan­cel­lor to ex­tend spend­ing on emer­gency busi­ness sup­port mea­sures will grow louder if the na­tion heads for a sec­ond na­tional lock­down.

But for many firms, fur­ther in­jec­tions of pub­lic money may only de­lay the in­evitable. One re­struc­tur­ing in­sider says he ex­pects a “pro­tracted doom glide” over the next two to four years as com­pa­nies strug­gle to sur­vive the re­ces­sion and many even­tu­ally suc­cumb to in­evitable col­lapse.

Bank bailouts and low in­ter­est rates helped weak firms to sur­vive the 2008 cri­sis, lead­ing to fears of a rise in “zom­bie” com­pa­nies, par­tic­u­larly in the restau­rant and leisure sec­tor where sup­ply out­strips de­mand.

For weak com­pa­nies hop­ing to sur­vive an­other re­ces­sion, stop-start eco­nomic shut­downs may not be so be­nign.

State sup­port schemes may have only of­fered some strug­gling firms a tem­po­rary stay of ex­e­cu­tion

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