Overall, the rate of business failures continues to remain at artificial and record low levels. The business failure rate was 16 per 10,000 companies over the last 12 months to the end of June 2022. This rate is much lower than the average rate over the past 17 years of 52 per 10,000 businesses, with a peak of 109 per 10,000 in 2012.
Q2 2022 v Q1 2022: The number of business failures (4.2 failures per 10,000) in Q2 2022 was marginally higher than the previous quarter (3.7 failures per 10,000), representing an increase of 14% quarter on quarter. When the first half of this year is compared with the same period in 2021, there is an even greater increase in business failures at 18%.
Q2 2022 v Q2 2021: In the same quarter last year, there was a business failure rate of 3.6 per 10,000 representing a 17% rise in the number of businesses failing when compared to Q2 of 2022.
This is according to PwC's latest Restructuring Update Q2 2022, published today, following the firm's inaugural report 'Act Now: From Recovery to Growth', published in February 2022.
Ken Tyrrell, PwC Ireland Business Recovery Partner, said: "The business failure rate continues at a record low, but there are clouds on the horizon. We are now seeing business failure levels slowly but steadily increasing, albeit still from a very low base. The economic supports that were put in place during the pandemic have now been removed, most notably the Employment Wage Subsidy Scheme (EWSS). Similar supports were removed in the UK during Autumn 2021, followed by a very significant pick up in liquidations in the following two quarters. It remains to be seen for how long those organisations under financial pressure in Ireland can stay in business".
"In our inaugural report, 'Act Now: From Recovery to Growth' published in February 2022, we estimated that over 4,500 businesses were saved from failure primarily as a result of the Government's COVID-19 support, with a number of these businesses essentially being put on 'life support'".
There was a 58% increase in the number of SME liquidations in Q2 2022 compared to Q1 2022 which was the primary driver in the overall increase in the business failure rates. This trend is expected to continue in the second half of 2022.
There has been a significant drop in the total number of receivership appointments during the second quarter of this year when compared to the previous quarter. Only 11 receiverships have been recorded in Q2 2022, this represents a 66% decrease from Q1 2022.
The UK is trending towards its 17-year average business failure rate (52 per 10,000) whilst Ireland remains far below its average (39 per 10,000) with an annual liquidation rate of 11 per 10,000 at the end of Q1 2022. As such, a clear divergence is beginning to emerge between the liquidations rates of the UK and Ireland.
Business failures in the hospitality sector increased but remained at relatively low levels – recording an insolvency rate of 8 failures per 10,000 during the quarter. Sectors seeing the highest increases in insolvencies during Q2 compared to Q1 included health and energy and utilities. Travel and transport, Arts, entertainment and recreation and real estate have all seen significantly reduced numbers of business failures from their peak pandemic levels.
Kilkenny had the highest business failure rate on a per-county-basis recording 13 business failures per 10,000 businesses in Q2 2022 compared to 2 per 10,000 in Q1 2022. Dublin recorded a marginal decrease in insolvencies per 10,000 businesses in Q2 compared to Q1 – a fall from 7 per 10,000 in Q1 2022 down to 5 per 10,000 in Q2 2022. There were no business failures recorded in eight counties during the second quarter of the year: Carlow, Donegal, Leitrim, Longford, Mayo, Sligo, Tipperary and Wexford.
The uptake of the small company rescue process (SCARP) remains very low (3 to date) and there were a similar number of SCARP appointments as there were examinerships (2).
Ken Tyrrell concluded: "Businesses are now faced with challenges many have never had to face before: rising inflation, interest rates and energy costs. We are likely to see increased pressure on profitability and cash flow over the coming months through Autumn and Winter 2022. And as the Government pandemic support has now expired, businesses will have to rapidly assess their core underlying profitability and ability to trade in the absence of wage subsidies and financial support".
"Our analysis shows that business failures in Ireland, while at current record low levels, are beginning to increase slowly but steadily. We expect increased restructuring activity to hit Ireland with an increased level of business failures in the later part of this year and 2023".
"Also, over the remainder of this year and into 2023, we expect that an increasing number of businesses will avail of Government's Small Company Administration Rescue Process (SCARP) restructuring tool, as well as the under-utilised examinership process, as they seek to deal with legacy debts that they have little or no prospect of repaying."
Our analysis is based on a per 10,000 measure which has become all too commonplace to hear since the pandemic. It is also widely used when comparing the birth or death rates across different regions or countries. It is a simple yet effective statistic for comparison purposes between different periods, industries, towns, counties or countries with different population sizes. It provides meaningful context to the numbers rather than simply looking at them in absolute terms.
SCARP stands for Small Company Administration Rescue Process. The small company rescue process ("SCARP") was enacted by the Government to provide an alternative restructuring tool for businesses commencing in December 2021.
At the end of May 2022, over 90,000 businesses were still availing of the Revenue Debt Warehousing scheme with €2.9 billion in tax debt still owing, equating to over €32,000 on average for each business. This equates to 4% of the total tax revenue collected in 2021.
The iTraxx Crossover index is a reliable and commonly-used measure of volatility in global financial markets. The increased volatility during Q2 saw the index rise to 513bps on 28 June, almost doubling since the start of the quarter.
The report suggests the following actions for businesses.
Companies must reappraise and shore up their liquidity and working capital requirements to address the unwinding of government support and debts accrued during the pandemic, while meeting renewed customer demand and delivering delayed investment.
The limited availability of further government support will increase reliance on existing lenders, shareholders and access to the capital markets, which may be less forthcoming in sectors where the prospects for recovery and long-term growth are less clear.
In this uncertain and potentially stop-start pathway to recovery and economic growth, it's essential to monitor cash flow and develop realistic forecasts which take account of potential varying recovery scenarios and, in particular, increasing rates of inflation in Ireland and around the world.
The immediate demands don't just include day-to-day expenses, but also funding for future growth and adapting to the trends reshaping marketplaces and economies. Revised and flexible business plans will be required to allow for quick forecasting and reacting to market changes. Robust data-driven reporting will enable a fast response to changes and prevent profit leakage.
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