Insolvency practitioners are gearing up for a rise in the number of distressed UK companies in 2022 as businesses battle increasing costs, a supply chain squeeze, staff shortages and the threat of further coronavirus restrictions.
The signs that companies were increasingly struggling as pandemic financial support measures tapered off were evident in November, when insolvencies in England and Wales hit their highest level since January 2019, according to government data.
“The number of macro headwinds that are facing all sectors, but some in particular, are just extraordinary,” said Adam Gallagher, a restructuring partner at law firm Simpson Thacher & Bartlett. “They all point to inflation, be it energy, logistics, raw materials, freight, wages — the list goes on.”
The number of companies falling into insolvency processes such as administration or liquidation plummeted after Covid-19 first struck last year. Businesses were propped up by government support such as the furlough scheme and taxpayer-backed loans while private investors continued to pump cash into liquidity-starved companies.
That has started to change with the withdrawal or reduction of government support schemes, repayments becoming due on government-backed pandemic loans and rising interest rates.
“It has got busier over the past few weeks [and] it will continue to get busier. I cannot see [the government] coming back with the same support measures as we had [earlier in the pandemic],” said Blair Nimmo, chief executive of Interpath Advisory, the restructuring advisory firm that was spun out of KPMG in May.
But with access to relatively cheap private finance available, few experts believe next year will break any records. “Do I expect this big, massive wall of insolvencies? No, I don’t think so,” said Nimmo.
Atradius, a trade credit insurer, has predicted insolvencies will be 33 per cent higher in 2022 than in 2019. Much of the activity so far has been in the energy sector, where surging wholesale prices caused more than two dozen suppliers to collapse in the second half of 2021.
Rising fuel costs will have a knock-on impact in other sectors, particularly energy-intensive ones such as industrial manufacturing. Kevin Ellis, UK chair and senior partner of PwC, said he also expected construction, hospitality and retail to be hit.
Depending on the course of the pandemic in 2022, the travel industry could also be vulnerable. In a sign of the uncertainty facing the sector, Ryanair warned this month its losses this year could be more than double market expectations because of the impact of the Omicron variant. Europe’s largest airline by passengers carried said its forecasts were “hugely sensitive to any further positive or negative Covid news flow”.
Many sectors are struggling to find staff in a tight labour market. “We’re running a number of care homes [and] we’re having to run at 75 per cent occupancy because we can’t get staff,” said Geoff Rowley, chief executive of FRP Advisory, a corporate finance and restructuring firm.
Rising costs are also affecting the construction sector. While some builders have benefited from climbing house prices, others are locked into fixed price contracts as the cost of labour and materials increases.
Rowley said he was advising companies that had “entered into fixed price contracts three years ago, their projects got massively delayed by Covid, material prices have gone through the roof [and] getting staff has become problematic”, adding: “They’ve had to absorb millions of pounds of losses and they don’t have a balance sheet to absorb millions of pounds of losses.”
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