Addressing the Rising Trend of Corporate Insolvencies in 2023: Recommended Solutions

The global economy is experiencing a rapid rebound in business insolvencies, posing significant challenges for businesses worldwide.

If you are reading this document, you will get updated information on the rising trend of insolvencies until April 2023, including forecasts for insolvency rates and the impact of lower growth and credit conditions. Additionally, I presented some recommended solutions to mitigate the effects of this concerning trend, based on my multi-decade experience in credit risk management and insurance.

Updated Insolvency Forecasts:

In the UK, the number of registered company insolvencies in April 2023 was 1,685, 15% lower than in the same month in the previous year (1,988 in April 2022). However, this was higher than levels seen while government support measures were in place in response to the coronavirus (COVID-19) pandemic and also higher than pre-pandemic numbers (see the graphs provided by the UK Insolvency Service).

There were 183 compulsory liquidations in April 2023, which is nearly twice the number in April 2022. The number of compulsory liquidations has increased from historical lows seen during the coronavirus pandemic, partly as a result of an increase in winding-up petitions presented by HMRC.

In April 2023, there were 1,368 Creditors’ Voluntary Liquidations (CVLs), 23% lower than in April 2022. The number of administrations and Company Voluntary Arrangements (CVAs) was higher than in April 2022.

According to a recent Allianz SE Insolvency Report published in April 2023, these are the major projections:

a. Global Insolvency Index: The Global Insolvency Index is projected to surge by +21% in 2023 and +4% in 2024, indicating an acceleration in the number of business insolvencies.

b. Pre-Pandemic Levels: Half of the analyzed countries are expected to surpass their pre-pandemic levels of insolvencies in 2023, with three out of five countries projected to do so in 2024.

c. Insolvency Projections in Europe: France is anticipated to see 59,000 cases (+41% y/y) in 2023, the UK expects 28,500 cases (+16%), Germany forecasts 17,800 cases (+22%), and Italy predicts 8,900 cases (+24%).

d. Insolvency Projections in the US: The US is expected to witness a significant increase of +49% in 2023, resulting from tighter credit conditions and a sharp economic slowdown, leading to a return of 20,000+ insolvencies per year.

e. Insolvency Projections in China: China is forecasted to experience a moderate increase of +4% in insolvencies, primarily due to ongoing challenges in the construction sector.

In another recent insolvency forecast report, the credit insurer Atradius highlights the challenges faced by businesses due to the lingering effects of the pandemic, tighter financing conditions, and rising inflation too and these are the major causes of rising insolvencies according to the report:

a. Withdrawal of Government Support: As governments gradually withdraw pandemic-related support packages, businesses are finding it increasingly difficult to sustain their operations and manage their financial obligations.

b. Economic Challenges: The global economy faces new challenges such as high inflation and tighter financing conditions, making it harder for businesses to secure the necessary funding and resources to survive.

c. Adjusting to Normal: Countries that previously benefited from generous pandemic support measures are now undergoing an adjustment to a more normalized state. This adjustment, coupled with the bankruptcy of zombie firms, is driving an increase in insolvencies in certain markets.

The report highlights also regional insolvencies insights, which reflect the global trend:

a. North America: Atradius predicts a 71% increase in insolvencies in North America, primarily driven by the United States, reflecting the challenging economic conditions and withdrawal of government support.

b. Asia Pacific: The Asia Pacific region is expected to experience a 56% increase in insolvencies, with countries like South Korea, Hong Kong, and New Zealand facing significant challenges.

c. Europe: Europe is anticipated to have a relatively mild increase of 27% in insolvencies, owing to its advanced process of normalizing the economy. However, the United Kingdom remains a concern due to its low growth environment and weak economic recovery since Brexit.

Impact of Lower Growth and Credit Conditions:

Among the major causes for this insolvency trend revamp, stated by the two reports, we can summarize three major reasons: ?

????????I.???????????GDP Growth Requirement: To stabilize the number of insolvencies, the Eurozone and the US would need an additional average GDP growth of 1.3pp and 1.5pp, respectively, in 2023-2024. The current muddle through environment is a key factor contributing to these projections.

??????II.???????????Domino Effects: The number of insolvencies for firms with revenue exceeding EUR50mn has surpassed pre-pandemic levels, particularly affecting the construction, retail, and services sectors.

????III.???????????Resilience of Fragile Companies: Prolonged pressure on profitability, weaker cash buffers, and tighter financial conditions are testing the resilience of vulnerable companies. Sectors with limited pricing power, high wage bills, and rising interest repayment costs are particularly affected.

Recommended Solutions:

Based on my consolidated expertise in risk and credit management, at both private and government level, I recommend five major solutions to address this rising issue:

????????????????????????????????I.???????????Strengthened Credit Management: Businesses should prioritize effective credit management practices, including improved working capital requirements, to maintain financial stability and mitigate the impact of insolvencies.

??????????????????????????????II.???????????Economic Support Measures: Governments should consider implementing additional economic support measures tailored to the specific needs of businesses, including financial assistance programs, tax incentives, and regulatory relief.

????????????????????????????III.???????????Industry-Specific Support: Industries facing significant challenges, such as construction, retail, and specialized services, require targeted support through sector-specific initiatives and collaborative efforts.

????????????????????????????IV.???????????Enhanced Financial Monitoring: Regular monitoring of financial indicators and early identification of potential risks can help businesses proactively address financial vulnerabilities and make informed decisions.

??????????????????????????????V.???????????Collaboration and Knowledge Sharing: Promote collaboration between businesses, financial institutions, and government entities to share best practices, resources, and industry insights, fostering a collective effort to overcome insolvency challenges.

Conclusion:

The rising trend of business insolvencies demands immediate attention and action. By implementing the recommended solutions I have highlighted above, including strengthened credit management, economic support measures, industry-specific initiatives, enhanced financial monitoring, and collaborative efforts, the adverse effects of insolvencies can be mitigated. It is crucial for stakeholders across sectors and regions to work together to bolster economic resilience, support businesses in distress, and foster sustainable growth in the face of these challenging circumstances.