Blog: Do insolvencies spell trouble?

Blog: Do insolvencies spell trouble?

Eileen Blackburn

With third-quarter corporate insolvency statistics to be published this week and likely to show a continued rise in the number of business failures in Scotland, Eileen Blackburn, head of restructuring and debt advisory at French Duncan, looks at what the trend can mean

The first two quarters have seen 504 corporate insolvencies, which is almost two-thirds of the total for 2017, clearly indication of a rising trend.

Given that we have not had more than 1,000 corporate failures in a single year since 2012, the prospect of this level of insolvency returning to Scotland is daunting, if unsurprising.

We can see that, despite benign interest rates, the corporate market has several sectors which are suffering badly. Construction, restaurants and retail insolvencies account for more than 40 per cent of corporate failures this year, and this only looks set to increase as these sectors struggle with a diverse range of issues, from limited financing, a changing marketplace and an uncertain economy impacting consumer confidence.

There is little doubt that Brexit is causing difficulties. A recent Bank of England report found outstanding loans to construction and civil engineering firms contracted for six months in a row to August, the longest run of declines since 2011. Lenders are clearly concerned that uncertainty over the outcome of Brexit could lead to a substantial fall in property values and would rather hold off investing than commit and get their fingers burned.

For high street retailers and casual dining outlets, multiple issues are affecting their viability. Shops face increased competition from online sales, a decline in footfall and intransigent landlords and councils who still believe they can make a fast buck from such outlets. Casual dining is also suffering from the high street decline and this has been exacerbated by the enormous rise in the number of home delivery services, resulting in large-scale oversupply.

The consumer, lacking confidence in the immediate future, now has a lot more options in where to spend their discretionary cash, and eating takeaways at home or using discount vouchers when going out has become the norm. The result is a crisis for a dining sector paying more in rent and rates, staffing costs and supply charges.

Corporate failures tend to rise and fall but this time it is unusual. The last peak was in the years immediately after the financial crash, when such outcomes were to be expected. But this time interest rates are mild, employment is at a 43-year high and the economy is growing, albeit relatively slowly.

The concern is whether this highlights an underlying economic problem or if it is a temporary blip as markets realign and settle at their own level. The next few months will be telling but, in the meantime, I think many more Scottish firms will go bust until greater stability can be established in the market.

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