Business failure rate surprisingly low but surge likely

For many businesses, the recent imposition of a new round of strict measures to control the spread of coronavirus was seen as a step too far.

Some firms, predominantly in the hospitality and retail trade, warned that they would likely never open their doors again.

However, so far, in the course of the pandemic, the level of business failure has remained remarkably low.

According to figures from Deloitte, which covers the period up to the end of September, the total number of corporate insolvencies in the first nine months of the year was 431 – a reduction, albeit very marginal – on the 439 recorded in the same period last year.

“State-backed initiatives to support struggling companies affected by the Covid crisis, as well as creditor forbearance, including forbearance from the banking sector, have played a major part in preventing an early surge in corporate insolvencies,” David Van Dessel, a financial advisory partner at Deloitte explained.

Indeed, the loan payment breaks – offered by all the main banks from the start of the pandemic – have provided a lifeline to mortgage holders and businesses in what’s been a time of crisis for many.

Central Bank Deputy Governor Ed Sibley said last week that around 11,000, or a fifth of all, SME (small and medium enterprise) loans were on pandemic payment breaks as of early October – just days after the banks stopped formally providing the facility to new applicants and vowed to deal with companies on a ‘case by case’ basis.

Mr Sibley said continued supports would likely be needed by firms in the year ahead and he warned that many would continue to experience problems in the near term.

“Even when all supports are factored in, around one-in-six [SMEs] is likely to be financially distressed into 2021 as a result of the effects of the pandemic,” the Deputy Governor said.

That’s a lot of businesses that could be at risk of falling into difficulty in the year ahead and some of them may not make it through.

Artificial environment

Neil McDonnell, chief executive of the small and medium enterprise representative group, ISME, described the current trading environment as ‘artificial’, when all of the supports and forbearance measures are taken into account.

“If those supports weren’t there, you’d be seeing a significant number of insolvencies. And we know the supports can’t go on indefinitely. Don’t judge the viability of SMEs using the insolvency figures,” he cautioned.

Neil Hughes, Managing Partner with Baker Tilly, who specialises in examinerships, said normal restructuring activity had in effect been suspended because of the supports that were in place.

He says it will likely be well into next year before insolvencies emerge in larger numbers, a situation which he says would largely be in keeping with experience from previous downturns.

“Businesses typically have some reserves that they will burn through in a period of crisis and they will burn through favours in that period. That can take one to two years after the initial recession. Then the business runs out of cash and it runs out of road.”

He points to the last downturn and cites the unemployment rate hitting a peak in early 2012, some three to four years after the initial economic hit.

“It could be similar here. It could be late 2021 or into 2022 before it gets really tough for businesses and they start to run out of road.”

The evidence so far

According to Deloitte’s figures, it was the services sector that topped the list of insolvencies in the first nine months with 154 appointments, or just over a third of the total.

Next came retail, where 88 companies entered an insolvency process, followed by the hospitality sector, which recorded the third highest level with 70 incidences.

Of the 70, companies operating in the food services sector accounted for half of the insolvencies.

“Interestingly, there has only been a marginal increase in insolvency activity for the hospitality sector when compared to the same period in…