CORPORATE INSOLVENCY
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significantly in Italy (from 11% to 7%) and France (15% to 12%), but also in Germany (7% to 6%) and even in the UK (18% to 17%).
// INTEREST RATES WILL LIKELY SOUND THE DEATH KNELL FOR MANY UNSUSTAINABLE COMPANIES //
A closer look These varying rates of recovery inevitably make it harder for investors to differentiate between strong companies and those that have been artificially propped up. “Liquidity has never been as critical,” says Simon Longfield, restructuring advisory partner at UK-based business advisory firm FRP. “And I believe we will see a recalibration of deal metrics to factor in the challenges that businesses are now facing. Lower leverages will be the order of the day.” The removal of federal Covid 19
support is inevitably exposing vulnerable firms. Many of those that survive will have to restructure to do so, meaning, says Simon, “The fund management sector’s attention will switch from M&A activity to discounted stressed and distressed assets.” Individual insolvencies may yet be kept
at bay if the banks, which are arguably in a stronger position than they were in 2008, demonstrate more debt forgiveness. Chris Kennedy ACSI, managing director at US-based global turnaround specialists Alvarez & Marsal, says: “The purchase of asset-backed securities and the sale of billions of dollars of these products every month to the Fed has given the banks a massive amount of liquidity. This has
come to a halt, and they no longer have that flow of sales or income, and quantitative tightening will impact them. But they are much better capitalised than last time round.” Tax regimes have also shown
patience (at the end of 2021, the UK’s HMRC was owed a record £65bn) and legislation is also encouraging forbearance. In the UK, the Corporate Insolvency and Governance Act 2020 (CIGA 2020), introduced to enable companies to restructure their balance sheets, will gradually have more impact as support measures disappear. The 20-day initial moratorium could, for example, be used more frequently when there’s viable opportunity for a business to be rescued as a going concern. But does this simply prolong the artifice in weaker companies, protecting business owners while putting their investors at risk? “Insolvency rates may be affected by
business owners’ expectations regarding the future,” says Jean-Daniel Breton, chair of the Canadian Association of Insolvency and Restructuring Professionals (CAIRP). “If business owners believe the economy will deteriorate, they may decide to stop operations and liquidate, while if they believe the economy will generally get better, they may invest more, undertake restructuring measures, or show more resilience.”
UK BANK RATE
6 5 4 3 2 1
0 2010 2012 2014 2016 Bank rate Source: Bank of England 2018 2020 2022
Welcoming change So, would a proliferation of vulture funds swooping on vulnerable companies necessarily be a negative outcome – or is it an inevitable byproduct of capitalism that helps make the world go round? The latter, suggests Jean-Daniel: “We should not be looking at insolvency rates as necessarily being a ‘bad thing’. Insolvency is a normal process that denotes a healthy economy. While we strive to avoid insolvencies and keep insolvency rates low, a total absence of insolvency in an economy would be indicative of a serious problem, namely either that the statutory framework does not allow the possibility of relief if one is in financial difficulty, or if the insolvency laws exist and are fair, an absence of insolvency cases would mean that business owners are not taking risks and entrepreneurship is being stymied.” There is an argument that
reducing insolvencies and allowing 32 THE REVIEW MARCH 2023
Bank rate %
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