2023-05-12 08:48:59
- In 2022, around 23,400 businesses failed in the UK, the highest level of business failures since the 2009 global financial crisis.
- This rapid increase comes following two years with very low levels of claims.
- Defaults mainly concern small businesses and mainly take the form of voluntary liquidations following a request from creditors (Creditors Voluntary Liquidation, CVL). Large corporate default levels remain below 2019.
- Q1-2023 figures show that insolvencies continue to rise, and are now less concentrated in micro and small businesses.
- In 2023, bankruptcies are expected to have a greater effect in terms of jobs and a higher financial cost.
Before 2020: a pre-pandemic world with few failures
In the years before the pandemic, business failures had been relatively stable: between 2015 and 2019 around 16,500 businesses per year were declared insolvent. The insolvency rate also fell, with a drop from 47 to 42 insolvencies per 10,000 businesses in operation. In 2019, business failures were relatively low: we had gone from around 250 failures per 10,000 businesses in operation in 1992-93 to around 40 per 10,000.
This fall in the default rate was largely explained by the fall in interest rates over the past thirty years. but also by a better macroeconomic situation compared to 1992-93, as well as by more solid fundamentals. In particular, the net margins of listed companies had increased from 4.3% in 1992-1993 to 7.6% in 2017-19.
2020-2021: years marked by public support schemes
The year 2020 was a singular year, the numerous measures taken by public authorities to support companies during periods of confinement having completely changed the dynamics of insolvency. These devices, such as partial unemployment, guaranteed loans, the suspension of certain commercial laws (lawful trading rules) and a moratorium limiting liquidation requests (winding up petitions) resulted in a dramatic drop in the number of corporate insolvencies in 2020 (-28%). This also remained at a historically low level during the 1is semester 2021.
Once these measures ended, the secured loans had to be repaid and the moratoriums expired, business failures began to normalize. Thus, with the end of the suspension of certain trade laws on 1is July 2021, the number of voluntary liquidations (CVL) has increased rapidly. Forced liquidations (compulsory liquidations) saw an even greater increase following the end of the moratorium in February 2022. Failures were around 50% higher in the months following this change and almost 3 times higher following 6 months.
Business insolvencies increased by 11% in 2021 and 57% in 2022 : they exceeded the 2019 level by 26% to reach their highest level since 2009. It is also important to point out that themicro-enterprises, which accounted for 73% of insolvencies in 2019, saw their share increase to 81% in 2022. Excluding this category of companies, the number of insolvencies remained 9% below the level of 2019. This explains why even if the number of insolvent companies increased, the impact on unemployment levels and in terms of financial cost was limited.
From 2023: a more classic but not very glorious situation
UK businesses now find themselves in an environment where there are no more support measures and therefore in a world where business failures are once once more determined by their levels of liquidity, profitability and their ability to cope. to their financial obligations. We are thus back in a classic scheme but not necessarily easy for companies.
Indeed, a number of companies have seen their debt increase during the periods of confinement and this will have to be repaid or refinanced over the next few years.. Costs will also remain high linked to the prices of energy, raw materials in general, and wage levels. In addition, consumers saw their real disposable income fall for the 2do consecutive year in 2023.
All of this comes at a time when the low interest rate environment that allowed many businesses to thrive is over.. The interest rates enjoyed by private non-financial companies fell from 3.1% on average in 2019 to 6% during the 1is quarter of 2023. And the outlook for rates has only deteriorated since the failure of Silicon Valley Bank in March 2023. Banks, which had already tightened their credit conditions before this failure, are expected to continue to do so during of the next few months. This situation might thus trigger a spiral in which the increase in insolvencies would lead to a restriction of bank lending which, in turn, would harm the viability of companies, leading to new insolvencies.
Some sectors are more exposed than others to these risks
Other industries, such as automotive, transportation, energy, and construction, have also seen sharp increases in insolvencies, with construction being the hardest hit sector in 2022 with around 5,200 business insolvencies, or an increase of 34% compared to 2019.
For the coming months, companies in the hotel and restaurant industry, distribution, and construction indicate that they are more likely to be exposed to a moderate or significant risk of insolvency than in other sectors. Nearly a fifth of businesses in the hotel and restaurant sector indicate that they are very sensitive to increases in wages and energy prices, as well as changes in consumer habits.
Analysis of liquidation requests filed and notices of intent issued at the sector level indicate a further increase in insolvencies ahead in most sectors. The metal, chemical and construction sectors are likely to see more companies go insolvent. These are evolving in a context of falling demand, while their costs remain high in energy-intensive sectors.
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