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Economy

UK corporate insolvencies forecast to rise by 3%

Thursday, 13 December 2007

Corporate bankruptcies in the United Kingdom are expected to rise 3 per cent in 2008, after falling more than 6 per cent in 2007.

Financial services turmoil combined with high interest rates and a strong GPB will continue to put pressure in 2008, driving GDP growth into a slowdown.

Global Insight, who specialise in economic and financial analysis and forecasting, forecasts that the industries that face the greatest increase in risk ratings in 2008 are in the financial services, agriculture, chemicals, metals, and construction sectors.

Credit squeeze

Relatively high-risk ratings in utilities and beverages combined with weaker balance sheet positions for companies operating in these industries provide more exposure to default probabilities.

Financial institutions and insurance companies' risks should be impacted significantly by the current credit squeeze and resulting slower business activity. In particular, more profitable but highly risky segments of investment banking and lending are at risk.

Retail banks should expect to continue suffering from high bad-debt charges arising from their consumer loans and credit card businesses, as high interest rates and surging house prices have added even more pressure on already heavily indebted UK consumers.

Construction is negatively impacted by the turmoil in financial services, as mortgage lenders are expected to be less aggressive in pricing and risks, affecting the demand for new houses.

Stronger credit risks

Skyrocketing house prices in the last couple of years are expected to grind to a halt in 2008, increasing pricing and profitability risks for home builders.

Overall declining capital expenditures in the United Kingdom and a continued growth of energy input costs will add to surging pressures respectively on growth and profitability risks.

In turn, cash flows will be hit and segments with relatively high historical debt risk ratings such as construction materials will face stronger credit risks.

Agriculture in the UK faces the same kind of situation as in the rest of Europe, with a saturated domestic market offering limited growth prospects, leading to fierce competition on pricing.

On the exports market, the strong GBP makes British crops less competitive and less room for sales growth.

Combined with rising energy prices and input costs, this should further damage margins and contribute to a significant increase of profitability risks.

Basic industrial chemicals and fertilizers and pesticides should also see their growth risks increase as a result of declining expenditures by the construction and agriculture industries.

Together with high oil prices, poor growth prospects will in turn lead to soaring operating profits risks, in particular for petrochemicals producers and rubber and plastics manufacturers.

Strong-currency European exporters

Global Insight said that chemical companies in the United Kingdom are not really exposed to large debts, however, although specialty chemicals show a fairly higher asset-to-equity ratio, which will be a beneficial in a downward cycle.

Metals products are facing stronger competition on the export market since China has become a net exporter of steel since 2006, making it more difficult for strong-currency European exporters such as the United Kingdom to sell their production abroad.

Basic and fabricated metals are expected to be strongly hit, along with machinery and equipment makers and motor vehicles manufacturers.

A few sectors will see their risks profiles improve in 2008, such as electronics and pharmaceuticals. Energy-mining is also projected to show a slight recovery, as surging oil prices have a positive effect on profitability.

Growth prospects remain poor, however, and this industry still tops Global Insight's risks ranking.

Global Insight's quarterly Sector Risk Ratings are designed to assist credit analysts and asset managers in identifying the best prospects for movements in sector credit quality on a comparable basis across industries and across countries.

Corporate bankruptcies in the Eurozone are expected to rise 5 per cent in 2008, after surging 8 per cent in 2007. The split between the goods and services industries should deepen, as the former will continue to face increasing competition in export markets, in line with a stronger euro and decelerating economic activity in key foreign client countries, such as the United States.

Global Insight expects US corporate bankruptcies to increase 13 per cent in 2008, after rising an estimated 40 per cent in 2007. The majority of the increases are expected to occur in the agriculture, energy mining, and electronics industries, as well as in banking and real estate.

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