The direct economic impact of business failure will be significantly higher in 2023 compared to 2022 levels, PwC is predicting in its Q1 2023 Insolvency Barometer.
PwC research estimates that there was €1.8bn of debt owing from businesses that failed in 2022 with the average debt per SME (excluding the larger companies) being c.€2m.
On PwC’s tally, the largest ten company failures comprised over 50% (debt of c€900m) of the total direct economic impact of all the business failures in 2022.
PwC expects the overall insolvency rate to move closer to the long term average and back towards the 2019 pre-pandemic figure of 850 insolvencies. However, the Barometer warns that this could rise above 1,000 if a global recession takes hold.
Barometer data records a 39% increase in business failures in 2022 to 527 companies. This represents 20 business failures per 10,000 companies in 2022 compared to 14.4 in 2021.
Using the same metric, PwC says the business failure rate increased to 57% in Q4 2022 when compared to the same quarter in 2021 - 6.6 per 10,000 in Q4 2022, up from 4.2 per 10,000 in Q4 2021.
PwC says using the per 10,000 measure is useful for comparison purposes between different periods, industries, towns, counties or countries with different population sizes.
Current insolvency levels are still well below pre-pandemic levels, and running at just 18% of the peak rate in 2012.
The 2019 pre-pandemic rate was nearly twice as high at 36 per 10,000 and compares to an annual average of 53 business failures per 10,000 over the last 18 years. This long term average equates to approximately 1,000 business failures per year, far higher than the 2022 level of 527 companies.
Almost 1 in 10 insolvencies in Q4 2022 were either a SCARP or an Examinership appointment. The new SME restructuring option (SCARP) accounted for 4% of the total insolvencies in 2022 with 23 SCARP appointments (including 12 SCARP appointments in Q4 2022, more than the three previous quarters combined).
There was little change in the annual business failure rate for lender initiated receiverships in 2022 (78) compared to 2021 (81). All other 449 insolvencies were voluntarily initiated by the companies themselves or by other creditors.
In 2022, the arts, entertainment and recreation sector had the highest number of insolvencies with 73 per 10,000 companies. The rate of insolvencies in the hospitality sector nearly trebled to 46 per 10,000, up from 17 in 2021.
Energy & Utility companies faced a difficult year, with the overall insolvency rate nearly doubling from 22 per 10,000 in 2021 to 43 per 10,000 in 2022. The sector also had the highest rate of business failures in Q4 2022 with 33 per 10,000 companies.
Ken Tyrrell, PwC Ireland business recovery partner, said: “With economic headwinds remaining driven by high inflation, energy costs and interest rates, in our view, there will continue to be significant pressure on the profitability and cash flow of many businesses through the early part of 2023 at least.
“The focus should be on performance improvement and cost reduction with a view to cash generation and preservation.”
“We will continue to see most of the distress arising from SMEs and particularly small businesses. Alongside examinership, we expect to see continued increase in the use of the SCARP process during 2023. Investment will be critical for a good success rate within these restructurings and access to capital could well be tougher in 2023.”
In Tyrrell’s view, companies under financial pressure must re-appraise 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.
“With economic headwinds continuing, 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,” Tyrrell added.