The country’s leading accounting practices are expecting a rush of insolvency work in the new year, amid fears that the credit crisis will dry up the “wall of cash” that in the past has saved troubled businesses from going bust.
Industry experts predict that the number of insolvencies will rise by as much as 10 per cent now that banks are taking a more conservative approach to lending and other investors, such as private equity groups and hedge funds, which have saved troubled firms in the past, are taking a more cautious view on risk.
The insolvency department at PricewaterhouseCoopers (PwC) is braced for a busy new year. “We’re expecting a material increase in business,” Mike Jervis, a partner at PwC’s London office, said. “If you gauge from the last economic downturn between 2001 and 2002, there could be a 10 per cent increase in corporate insolvencies.” He believes that the department’s business will pick up by 5-10 per cent in the first quarter of next year and gather pace throughout 2008.
Phillip Davidson, KPMG’s head of restructuring advisory, said: “There has been a suspension of normal trading conditions in the last few years. Companies have been kept alive artificially, but now they’ll be caught up.” He added that companies that had been given a lifeline by their banks would struggle to refinance their debt, against a backdrop of higher interest rates and worried lenders. He did, however, note that funding would still be available for the right companies, even if economic conditions got worse.
The insolvency business has, on the whole, slowed this year. On Friday Begbies Traynor, the country’s biggest independent insolvency practice, said that full-year operating profit would be 20 per cent lower because of a lack of insolvency work over recent months. However, Ric Traynor, the company’s founder and executive chairman, believes that the number of corporate insolvencies could double over the course of 2008, from the present level of about 15,000 a year.
According to Stephen Akers, a recovery and reorganisation partner at Grant Thornton: “Whereas before maybe seven out of ten companies in difficulties could be restructured, the number could fall to four out of ten as less options are available. Businesses in difficulty can limp on, but in another couple of months they’ll be out of ideas. Raising finance is incredibly difficult and by late March, early April the statistics will demonstrate the effect of the credit crunch.”
The insolvency business typically runs up to six months behind general market movements because of the time between a company telling its bank that it has problems to the day that it becomes insolvent.
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