North West avoids rush of insolvencies during first month of COVID-19 pandemic

Rick Harrison

The number of North West businesses entering administration during April 2020 remained low as government support packages offered the vital headroom to deal with the ongoing COVID-19 pandemic.

According to new analysis from KPMG’s restructuring practice, only six North West businesses fell into administration last month, despite the economic impact of the pandemic.

Meanwhile, the first quarter of the year saw business administrations in the North West fall by 14% compared with the previous quarter, with 62 administrations between January and March.

When compared with the same period in 2019, administrations fell by 16%, down from 74.

The decrease is significantly higher than national levels, where a four per cent decline in insolvencies year-on-year was recorded.

Rick Harrison, restructuring partner at KPMG in Manchester, said: “Comfort can be taken from the fact that we haven’t yet seen the deluge of companies falling into administration across the region that many predicted.

“The breadth and depth of support measures available, coupled with a supportive lending and sponsor community, have given organisations vital breathing space in these early days of the crisis.

“The proposed changes to insolvency legislation, which include the suspension to wrongful trading rules, are also likely to help relieve the pressure on directors, many of which have chosen to stop production and/or enter hibernation where they may previously have had little choice but to appoint administrators.

“As we look forward, the old adage that ‘more companies fail coming out of a recession than fail going into it’ will be front of mind for many executives as they plan their exit from lockdown.

“It will be important for many directors to take the opportunity to ‘reset’ their business post-COVID-19 as they adjust to an uncertain economic environment.

“Over the coming months we expect to see an increased focus on cash and working capital management and targeted cost reductions to build business resilience.

“Meanwhile, those companies fortunate enough to have access to funding, including many PE-backed businesses, may also look to drive value through strategic ‘bolt-on’ investments and acquisitions.”

On a national level, a total of 61 companies fell into administration during April 2020, compared with 91 in April 2019 – a monthly low not seen since the financial crisis.

In total, there were 444 insolvencies during the first four months of 2020, down five per cent from the 468 seen between January and April 2019.

There remains a huge number of ‘unknowns’ which make planning for an exit particularly difficult – from how long it will take for customer demand to bounce back and minimising disruption across supply chains, to the cost of implementing social distancing measures, and whether the Government’s Job Retention Scheme will be tapered out, failing which many businesses are likely to make significant redundancies across their employee base.

Rick Harrison continued: “While recognising that things will not go back to the way they were overnight, and that a phased approach will undoubtedly be necessary, North West businesses will, nevertheless, need to take care not to fall into the classic trap of scaling up too quickly.

“Many will have burnt through cash reserves during the lockdown period, and while some will have taken advantage of the various government support packages available, it must be remembered that at some point, loans will still need to be repaid. A burden which comes on top of having to finance any ramp-up in production, repay creditor deferrals and re-engage staff who have been furloughed.”

He added: “Companies should, therefore, think about embedding as much of the cost-saving gains made in their initial crisis response as possible into their day-to-day operations, as well as opening dialogue with key suppliers and financial stakeholders on repayment plans that support a recovery on both sides of the table.

“Finally, it will be essential to model the medium to long-term financial impact of a market that may, ultimately, operate on reduced activity levels, and importantly, assess the cost base and funding required to support that, as it is highly unlikely to look the same as the pre-crisis operating model.”

KPMG’s recent analysis of the levels of stress and distress across corporate Britain showed that companies in the telecommunications, pharmaceuticals and food and drink sectors were best positioned to withstand the significant downturn.

Conversely, companies in the non-food retail, casual dining, and travel and tourism sectors, as well as those indirectly impacted, such as real estate, were most vulnerable to the current economic shock.

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