Cheap money offsets Sterling fall to keep insolvencies stable
31st January 2017

Record low borrowing costs, as well as ‘more patient creditors’ managed to offset the falling pound and the introduction of the National Living Wage to keep corporate insolvency figures roughly stable in 2016.

Andrew Tate, president of insolvency and restructuring trade body R3, said: “Despite a number of challenges for businesses in 2016 – the fall in the value of the pound since June’s EU referendum and the introduction of the National Living Wage among them – there is still a lot of downward pressure on corporate insolvency numbers to balance these out.”

“Businesses are enjoying a significant safety net: compared to the pre-financial crisis economy, creditors – particularly banks – are much more patient with their borrowers, businesses are benefiting from record low borrowing costs, and an increased focus by the insolvency and restructuring profession on early intervention has helped businesses avoid formal insolvency procedures.”

“Businesses are in a position where they can sit on cash or take on new borrowing. R3’s regular surveys of business distress have found that key signs of business distress are near their record lows, and that almost one-in-ten (8%) businesses are paying off only the interest on their debts.”

“The fall in the value of the pound since the summer will undoubtedly have been a shock to some smaller businesses though – almost half our members have said Brexit has come up in discussion with struggling businesses since June.”

"After half a decade of falling insolvencies, insolvency levels are lower now than they were even before the financial crisis. However, the decline now seems to have stalled and we’ve had a very small increase instead – that’s the first increase in insolvencies since 2011.”

He continued: “2017 will be an important test: many larger firms will have been protected from the pound’s fall by currency hedges or long-term fixed-price contracts, but these will unwind or end this year. Businesses have been buoyed by resilient consumer spending since the EU referendum but much of this is on the back of increased borrowing – it’s not clear how sustainable this will be. Firms in the South East and London will also have to adjust to new, higher business rates from April.”

Tate also added that, while the actual figure for corporate insolvencies had shown a spike in the year, this was due to ‘a wave of companies’ run by a single umbrella organisation closing in the last quarter, and the figure otherwise was stable on 2015.

www.r3.org.uk