6th August 2014
So, the UK apparently has the fastest growing economy in the G7 and we had 0.8% GDP growth in Q2 2014, so we’re out of the woods from an insolvency perspective? Far from it – let me explain….
I was recently chewing the fat with an old friend who said “You work in the debt and insolvency industry – bet you’ve been really busy during the last few years”. Imagine his surprise when I replied “Erm, not really”.
If you look at long term trends, insolvency runs in cycles which are broadly in line with the economic cycle, but like fiscal policy, there is normally a time lag.
As the recovery gains pace and we enter the “boom” phase, appetites at the lenders tend to travel up the risk curve. With more and more new business walking through the lenders’ doors and security appreciating in value, balance sheets look stronger and lenders are able to look at a lot more opportunity. As a former banker myself, I have witnessed this first hand.
This is all very well until the bubble finally bursts as happened in 2008. All of a sudden, there is a jump in non-performing lending due to tougher trading conditions, less business is walking through the doors of the lenders, and security values take a nosedive. With more stringent capital adequacy requirements, lenders have to re-evaluate their strategy.
With all of this going on, there is an increase in forbearance (even HMRC in recent years has gotten in on this action with “Time to Pay” arrangements). As long as interest is being covered, lenders are reluctant to take the matter to a formal recovery/insolvency as then that means the loans have to come off the books which weakens their balance sheets further. This is the environment that is the perfect incubator for the so called “zombies” – companies that are barely covering their costs and the interest on their debt. This is usually the calm before the storm from an insolvency perspective.
As the recession comes to an end, there is a quiet time while everyone seems to look at each other as if to ask “Is this it? Are we in recovery? Will there be a triple-dip recession?” and so on. As soon as it becomes clear that the recovery is definitely on track and balance sheets are improving and asset values are recovering, the lenders once again turn their eyes to this non-performing debt and sooner or later decide that enough is enough and it’s time to do something about it.
With interest rates expected to go up by 0.25% as early as November 2014, this will be the very catalyst for a dramatic growth in corporate and personal insolvencies in 2015. Watch this space…
Please be advised that all views expressed in these posts are those of the author and not of James Rosa Associates ltd.