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OPINION

Who liquidates the liquidators?

Who liquidates the liquidators?
February 9, 2012
Who liquidates the liquidators?

This gloomy assessment has been backed up by insolvency specialist Begbies Traynor’s Red Flag Alert, which revealed that the number of UK companies facing critical levels of financial distress rose 24 per cent in the final quarter of 2011 from a year earlier. And cracks are starting to appear in the previously resilient South-East of the country too, with the number of companies in the region showing distress jumping by a third.

Without wishing ill on businesses across the UK, a flood of business failures would at least good news for beleaguered insolvency practitioners which, despite the economic gloom, have been struggling themselves. In fact, insolvency practitioner RSM Tenon admitted that it made a pre-tax loss in the second half of last year, and there have been very real fears that the insolvency practitioner may go to the wall itself. Its shares have fallen from nearly 60p at the start of 2011 to just 6p today. Although rival Begbies Traynor has coped rather better with the insolvency doldrums - trimming costs and offloading businesses - it too has seen its share price suffer, down from a high of nearly 200p at the height of the 2008 recession to just 35p today.

How can this be? After all, the UK economy has taken a bashing over the past four years and is currently caressing the prospect of a double-dip recession. And isn’t it true that companies faced with a lethal cocktail of rising debt and falling profits are in greater danger of facing corporate oblivion? Apparently not, because through the successful use of measures to put off the inevitable (liquidation), interested parties such as banks and politicians have effectively moved the insolvency goal posts further down the road. Put simply, the normal business cycle no longer applies.

The stay of execution has come about through a more flexible stance by the government on the timing of VAT payments, while banks have resigned themselves to rolling forward corporate debt, simply to keep a lid on loan provisions. Companies are also blessed with interest rates at a record low, which is helping those that haven't managed to deleverage more easily afford their financing.

This has left insolvency practitioners all dressed up, but with no party to go to. Not, perhaps, until now that is. True, interest rates are likely to remain at historically low levels, but the other pillars of support that have propped up struggling companies are being kicked away. The lax regime on the timing of VAT payments has ended, while banks, faced with the prospect of having to raise fresh regulatory capital to boost reserves as a proportion of the loan book, are mostly choosing the alternative, and that is to shrink the size of the loan book.

Of course, a lot of larger companies have raised money through rights issues and bond issuance, and have been able to pay down debt - many have even built up useful cash piles. But for many smaller outfits, bank support remains a key priority. Yet not only are banks declining applications for fresh loans, they are also starting to pull the plug on existing agreements.

Ratings agency Standard & Poor’s has meanwhile predicted that this month has seen as end to the phoney war on forbearance, and a host of banks are predicting a sharp rise in corporate bond defaults from the current 2.6 per cent to as much as 5.9 per cent. If loans are included as well, default levels are expected to climb even higher.

So, is this payback time for the likes of RSM Tenon and Begbies Traynor? Maybe so. Major banks are being screwed to the floor in an attempt by the regulators to ensure better financial discipline and to create a greater buffer against any fresh contagion. Screwing small companies to the floor appears to be an unfortunate by-product, so perhaps we may yet avoid the irony of seeing an insolvent insolvency firm.