Although failure rates are at a record low, there are fears that Irish business failures could soar following removal of Covid supports.
Overall, the rate of business failures continues to remain at artificially and record low levels, according to new data from PwC’s latest Restructuring Update Q2 2022.
Although from low levels, business failures are up 18% in the first six months of 2022 compared to first six months of 2021; Business failures are up 14% in Q2 2022 compared to Q1 2022 and up 17% compared to the same quarter in 2021.
“It remains to be seen for how long those organisations under financial pressure in Ireland can stay in business”
The business failure rate was 16 per 10,000 companies over the last twelve months to the end of June 2022.
PwC estimates that up to 4,500 businesses in Ireland were saved from failure primarily as a result of Covid supports from the Irish Government.
Business failure rate on the increase
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.
“The business failure rate continues at a record low, but there are clouds on the horizon,” Ken Tyrrell, PwC Ireland Business Recovery Partner, explained.
“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 supports, with a number of these businesses essentially being put on ‘life-support’.”
58% increase in SME liquidations – trend expected to continue
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.
“We are likely to see increased pressure on profitability and cash flow over the coming months through Autumn and Winter 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 failure rate for hospitality increases
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 & utilities.
Travel & transport, Arts, entertainment & recreation and real estate have all seen significantly reduced numbers of business failures from their peak pandemic levels.
Kilkenny records highest business failures amongst counties
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).
“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 supports have 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 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.”