| Insolvency drop ‘calm before the storm’ |
|
|
| Thursday, 01 November 2007 | |
|
UK personal insolvencies dropped by 3 per cent during the third quarter of 2007, with 26,072 individuals entering into bankruptcy or an Individual Voluntary Arrangement (IVA). This quarter's figures represent a drop of 5 per cent on the same quarter last year. Figures issued by the Insolvency Service on Friday and analysed by Grant Thornton's Personal Insolvency practice show a continued decrease in IVAs from 10,699 to 10,239, a 4 per cent drop. They also show a decrease in bankruptcies by 2 per cent. Commenting on the continuing problem of personal debt, Mike Gerrard, head of personal insolvency at Grant Thornton, said, "In spite of relatively benign economic conditions over the past decade, personal insolvencies have gone through the roof and this recent drop is simply the calm before the storm as the credit crunch begins to bite beyond financial markets." Precarious balancing act Grant Thornton research found that the total amount of UK personal debt had exceeded UK GDP for the first time ever in September. Although the value of the country's property assets are able cover the outstanding amount of consumer debt of £1.38 trillion, the findings are symptomatic of the UK's well established 'buy now pay later' culture. Gerrard says, "We are seeing an increasing number of individuals turning to their credit cards to make mortgage payments. Using credit to pay off credit is a precarious balancing act performed on the thinnest of wires, and it only takes some missed payments and a switch from a fixed to variable mortgage interest rate to send these individuals into a downward spiral." Despite the slowdown in personal insolvencies over the previous two quarters, Gerrard believes it to be only a momentary reprieve if, amidst the background of the credit crunch, consumer confidence finally slows while the effects of previous interest rates rises, and the possibility of more, in addition to current housing market jitters take their full effect. He says, "The traditional lifeline of remortgaging one's main property is already agonisingly out of reach for many individuals as a slow down in house prices and the credit crunch drown out this option of last resort. Many will have already used this option before but simply plunged back into the red.” Gerrad added, “If Sir Philip Green's predictions of a slow down in consumer spending next year are prove correct, then I expect we will see a leap in personal insolvencies by the first quarter of 2008 as creditors tighten their belts and increase their rates of refusal on debt management options such as remortgaging." Lack of basic financial nous New statistics issued by the Ministry of Justice on Friday on house repossession orders made, which may or may not result in a formal repossession (as a high proportion of orders tend to be terminated at the last minute), have remained relatively stable. While increasing on the previous quarter by 7 per cent, they have decreased on same period last year by 1 per cent to reach 26,807. "As remortgaging to cover off debt is becoming less available there is a strong likelihood of repossession orders increasing over the next year," says Gerrard. Gerrard says a lack of basic financial nous in regards to debt management coupled with salaries not keeping pace with rapidly increasing costs of living is driving some individuals over the edge. He says that interest rates are sitting at 5.75 per cent, meaning an average variable rate mortgage of £153,800 is requiring an individual to pay £8,844 in interest per year, a hike of just under 50 per cent on interest payments in two years. Additionally, individuals have had to swallow sharp rises in household costs, which have increased by over 12 per cent in three years, and manage credit card debts, which may have interest rates of 15 per cent to 20 per cent and more on income which has risen by just 3.9 per cent in comparison. Gerrard says it is easy to see how the cumulative effect of a number of basic factors is stretching people's finances thin. IVA slowdown Commenting on the slow down in IVAs over the previous two quarters, Mark Allen, Grant Thornton's head of IVAs, says, "IVAs have dropped 14 per cent on the same period a year ago and this can be attributed to larger IVA providers facing higher marketing costs and an increase in rejections of IVA applications." Additionally, Allen says some of the more significant IVA providers have recently changed their focus from IVAs to offering informal debt management plans instead. “The market is maturing quickly and there will be further consolidation in the industry and an increase in quality following agreed protocols between banks and insolvency practitioners firms. While this will slow the IVA market for a while, the credit crunch may see more individuals reverting to insolvencies in the next few quarters as servicing their debt becomes unmanageable,” Allen says. Corporate insolvencies There were 3,106 liquidations in England and Wales in the third quarter of 2007. This was an increase of 1.8 per cent on the previous quarter, although still a decrease of 4.4 per cent on the same period a year ago. Malcolm Shierson, a partner in Grant Thornton's recovery and reorganisation department, said that after the total number of liquidations had dropped to its lowest level in more than two years in Q2, the increase in Q3 was a trend reversal worth noting, although it was too early to attribute it to the current credit squeeze. "The tightening credit environment only began to impact administration rates in September, and therefore the latest administration figures in particular are yet to reflect the activity we are now seeing the market. In fact, it would be fair to estimate that the rate of corporate insolvencies will increase by 5-10 per cent in the final quarter of 2007, with incremental increases over the next four or five quarters," Shierson concludes. He says that in recent years lenders' default position would be to try and turnaround an entity in financial turmoil, with insolvency only seen as a last resort. While debt restructuring is still seen as preferable, in just a few months of the credit squeeze the options open to an organisation in financial difficulty have narrowed considerably. The trend could see corporate insolvency rates grow substantially over the next year unless struggling companies take early action. Lenders are no longer willing to take a financial hit or increase debt facilities as liberally as they have in the recent past, and alternative sources of funding such as private equity and hedge funds are behaving more cautiously. This is making refinancing a tougher act to pull off. Shierson finds that the fact that hedge funds themselves are starting to feel the pinch also means they are less likely to be able to bail out distressed businesses. The complex debt funding vehicles that have multiplied within the finance sector recently are becoming increasingly expensive and high-risk to operate, and Shierson expects that the more speculative deals will struggle to attract the same level of investment we have recently grown accustomed to seeing. "Businesses that rely heavily on discretionary spending, particularly those in the leisure and retail sectors, will also face difficultly in 2008. Companies targeting the US as a key export market should also consider diversifying their exporting mix as the economic turmoil caused by the sub prime crisis and the record strength of the pound against the dollar continue to bite," Shierson thinks. Related articles Related links |
Subscribe to our weekly newsletter for top jobs, news and more 
Digg it! 
del.icio.us 
Newsvine 
Reddit 
Stumble It! 
With financial market volatility in mind, the Director of Finance Online team present alternative options on which you stand to make a healthy return your investments.