Insolvencies are likely to rise amid a “perfect storm” of rising interest rates, higher costs and a slowing economy.
“All the indicators show that insolvencies will rise and I think that our message is that management teams need to be taking advice earlier and recognising the problem earlier,” Sarah Rayment, the new co-lead of global restructuring at Kroll told City AM.
Rayment highlighted that rising interest rates would make it very difficult for firms to refinance debt over the coming years.
“Businesses on two or three-year facilities that traded through Covid may now be looking to refinance or renew facilities at a significantly higher rates,” she said.
High street lenders have been wary of lending to businesses at risk, although alternative lenders have increasingly stepped into the gap. Nevertheless, alternative lenders would still price their debt “accordingly”, Rayment said.
“If you’re a distressed business and you’re looking for an equity or debt injection, investors and alternative lenders have to see something that can be taken forward.,” she commented.
Those higher rates would pile more pressure onto businesses already struggling with higher costs and a weakening economy.
“They’ve also got all of the other factors including inflation, wage growth and recruitment issues. Some businesses won’t necessarily be able to recruit so they are having to possibly restrict trading – particularly in hospitality and leisure,” she said.
She also pointed out that outstanding HMRC debt was very high, pointing to the possibility of more winding-up petitions.
“It does just feel that we’re at a very difficult time for UK corporates,” she said.
Insolvencies have started to rise from very low levels post pandemic. In the most recent monthly figures, insolvencies were up 40 per cent compared to the year before with over 2,500 firms declared insolvent.
The likely surge in insolvencies reflects the unwinding of decades of low interest rates, Rayment suggested. In some cases though, insolvencies were the best option available.
“Zombie businesses that aren’t growing and can’t adjust can take up a lot of time and resources. Company failures happen, but from an insolvency point of view, sometimes it isn’t a bad thing to make that difficult decision,” she said.