Restructuring Insights

Despite a challenging financial period, there are emerging signs of economic recovery. Inflation has eased to 3.3%, offering a glimmer of hope. However, the Spring Budget (announced on March 6) introduced new hurdles from April 2024: businesses will face increased salary expenses due to the rise in the National Living Wage; an approximate 6.7% increase in business rates; and additional costs associated with the transition to net zero. The recent unemployment data highlights the general fragility that exists within the UK economy at present.

Creditors’ Voluntary Liquidations (CVLs) remain the predominant insolvency tool, accounting for approximately 80% of cases. Despite this preference for CVLs, there has been a notable 20% increase in administrator appointments compared to Q1 2023, signalling a shift in the strategies businesses employ when facing financial distress, and a sign that larger companies are also starting to experience acute financial challenges.

Regionally, the number of company insolvencies have remained relatively consistent with the exception of Northern Ireland, which has experienced an 86% surge in insolvency cases, albeit off a relatively low base with total insolvencies c.65 for Q1 2024 vs. c.35 in the same period last year.

The distribution of insolvency appointments by revenue class has not deviated from previous trends.

Smaller businesses continue to be the most vulnerable to insolvency and challenging market conditions, with 98% of insolvency appointments occurring within the lower market segment with businesses with annual revenues below £1 million.

Industry focus

The retail and hospitality sectors are enduring persistent market challenges. Notable high street names such as The Body Shop, Ted Baker, Matches and Vagabond Wines have succumbed to insolvency processes. These businesses have been particularly affected by a combination of commercial rental inflation, the continuing cost of living pressures impacting the discretionary spending of consumers and inflationary pressures on both input costs and wages.

The effects have been compounded as some business models are yet to fully evolve to flourish in post-pandemic market conditions amid changing consumer demands.

A number of insolvencies have also been identified within the recycling sector, including those within corporate and domestic, clothing, and metals recycling. This sector is grappling with its own set of challenges, primarily driven by inflationary pressures on essential input costs such as fuel and utilities. Ongoing shipping disruptions in the Red Sea and the impact of natural disasters and economic shocks in key trading export markets, most notably Turkey and Pakistan have also contributed to the financial strain on this sector.

In turn, the logistics and freight sector is reporting increasing insolvencies, with businesses being particularly concerned about risks linked to e-commerce customers. This sector usually spends significant amounts with logistics firms but are struggling with poor credit scores and access to credit limits.

Trends in the trade credit insurance market - which provides cover against the risk of businesses not being paid for goods or services that they sell - also provide a useful barometer of market sentiment.

PwC’s credit insurer clients report claim volumes are the highest they have been since 1993. However there is still a lag of businesses that have been able to survive post-pandemic due to Government support that are now becoming insolvent.

Additionally, suppliers are taking a harder line with their business clients, with more using Winding up Petitions to recover their debt and are prepared to follow through if needed. This is a significant shift as previously this would rarely be used in order to protect the business relationship and due to the cost.

Horizon-scanning

Looking ahead, 2024 appears to be another demanding year for UK companies. They must contend with the lingering effects of last year's economic upheaval, which includes consistently high fuel prices, persistent supply chain disruptions, the repercussions of global conflicts, and the cautious attitudes of lenders and consumers. The cumulative impact of these factors suggests that the path to stability and growth remains fraught with challenges.