More than 40,000 companies will be declared insolvent in 2009 says the Credit Management Research Centre (CMRC) at Leeds University Business School.
Forecasting models developed by the CMRC indicate that insolvencies will rise by 35 per cent compared with 2008 and by more than 62 per cent compared with company failures in 2007. (See Chart 1).
The CMRC analysis is available in the latest UK Risk & Insolvency Report, published by CreditScorer.
Nick Wilson , Professor of Credit and Finance at the Credit Management Research Centre, said: "Leeds University Business School has models that allocate an insolvency risk score to all individual companies in the UK based on their characteristics and performance, combined with indicators of financial health such as county court judgments and charging orders.
"In addition we have developed a forecasting model that predicts the aggregate level of insolvencies for the UK economy and for industry sectors."
The aggregate level of insolvencies is modeled in relation to changes in macroeconomic conditions such as GDP growth, inflation, interest and exchange rates; bank lending to the corporate sector; company leverage;, debt servicing and court actions to recover debts.
Professor Wilson added: "The fall in interest rates and the reduction in the value of sterling have alleviated the pressures on some companies, but these potential benefits are offset by falling operating profits in a highly leveraged corporate sector. (See Chart 2)
"In 2007 we correctly predicted a 20per cent increase in insolvencies for 2008. It appeared then that insolvencies would peak in December 2009 and then start to fall. Our revised forecasts show a persistently high failure rate into 2010."
Using the forecasting model CMRC is able to simulate the impact of different levels of bank lending to the corporate sector on the number and rate of insolvencies. The collapse of bank lending has put a strain on cash-flow management for many companies and particularly for small companies that use predominantly bank and trade credit to finance their operations.
"Our simulations suggest that a return to pre-recession lending levels would reduce the number of insolvencies in 2009 by around only 8 per cent," adds Professor Wilson. "The models that track individual company insolvency risk places just over 100,000 companies in the high risk category.
"Particularly at risk are companies that increased leverage in better times as a result of private equity investments and buyouts. A shift back from debt to equity is clearly a sound strategy for these companies. The analysis also shows an increased failure risk of smaller subsidiaries as parents jettison loss-making parts of the business."
In the UK as a whole the total value of county court judgments (CCJs) against companies rose by 26 per cent in 2008 (from £324m in 2007 to £408m in 2008). The numbers of CCJ's increased by 23 per cent to more than 73,000 individual actions in 2008.
The UK Risk & Insolvency Report can be accessed online at CreditScorer.com, a web based analysis of all insolvencies and county court judgments. It tracks and forecasts the changes in risk for all UK corporate industry sectors and regions on a monthly basis. The report contains incidences of insolvency and the insolvency rate over time; the number and values of county court judgments against UK companies by sector and region over time and 18 monthly forecasts of insolvencies and county court judgments.
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