News

Are Corporate Bankruptcies in England and Wales Set to Explode?

Here's an excerpt from a May 4 article in the British publication, the Independent:

Almost three-quarters of a million businesses in the UK are "at risk of failure over the next three months" because of the fallout from the Covid-19 pandemic, economists have warned.

The figure has prompted Labour calls for the chancellor, Rishi Sunak, to ease the pressure by allowing bosses to convert government loans to a "student-style" arrangement that would give them more time to repay.

Firms are being dragged down by more than £75bn of Covid debt from the government's bounce-back loan scheme and similar initiatives, Labour said.

But the Treasury watchdog has estimated that £27.2bn of these liabilities will never be repaid -- inflicting a huge cost on the taxpayer, on top of the loss of jobs and livelihoods.

Elliott Wave International's May Global Market Perspective mentioned the UK government's Bounce Back Loan Scheme as the publication showed this chart and said:

SuspiciousLackBankrupticies

In our view, the full withdrawal of pandemic-era financial assistance may be even more significant than the pandemic itself. One factor we keep an eye on is the definition of financial distress. Begbies Traynor defines it as businesses with "sustained or marked deterioration in key financial ratios," and the firm counts businesses that have received minor county court judgments. In other words, it reflects businesses that have already missed debt payments and firms that have already suffered significant hits to their bottom line. In our view, a far greater number of firms continue to bob just above the surface due to stimulus schemes such as the Coronavirus Business Interruption Loan Scheme (CBILS), the COVID-19 Corporate Finance Facility (CCFF), and the Bounce Back Loan Scheme (BBLS). Notice, for instance, this chart showing the number of corporate insolvencies in England and Wales. We used the word suspicious in the title of this chart because of that near-vertical plunge coinciding with the outbreak of COVID-19 on the right. In fact, bankruptcies dropped to multi-decade lows in 2020, penetrating the low-water mark set in December 2007. That previous low occurred 10 months before the worst days of the 2008 financial crisis. If our view about another big stock market bear is correct, the line on this chart will soon mount an equally rapid spike back up, ultimately eclipsing its previous extremes in 2012 and 2016 by a wide margin.