Posted on Tuesday 1 May 2012 by Ulster Business

Game

The video game retailer GAME became the latest in a long line of well known companies to enter administration proceedings at the end of March.

While a buyer was found for most of the business, the company closed 13 stores in Northern Ireland with the loss of 110 jobs.

It was an all too familiar story, and one that has been repeated numerous times since the downturn began in 2007.

The most recent insolvency statistics showed 87 company liquidations in the fourth quarter of 2011 and a total of 355 corporate insolvencies in Northern Ireland for the year. While that was 7% lower than the peak in 2010, the numbers edged up through 2011.

At a personal level, individual insolvencies reached 2,803 in 2011, up 21% on 2010 and interestingly about five times more than the 517 insolvencies at the time of the Good Friday Agreement in 1998.

Ulster Bank economist Richard Ramsey is in no doubt that both personal and corporate insolvencies will remain high for some time.

“While households would have wanted to pay down debts, because inflation has been so high and that has been squeezing incomes, the whole deleveraging process has been deferred and they haven’t got around to doing it. People know they should be doing it but just can’t afford to.

“Another issue is that many people will be rolling off deals who got mortgages out five years ago where the rate will be changing, the question is whether they can meet that,” he said.

The overall lending picture in Northern Ireland is weak, with many lenders impaired and the likes of Anglo Irish and Bank of Scotland (Ireland) no longer in the market. The lenders that remain are constrained by losses and are being conservative in their lending to individuals and businesses.

The economist added: “My view on the corporate side would be that at best we are looking at a sustained period of insolvencies and we may see a further pick up. I think we are going to be seeing those elevated levels for five years going forward.

“We are going to see increasing insolvencies from retail and consumer sensitive sectors like pubs and restaurants which will be hit by the inflation picture, and we’ll also see the legacy of the debt overhang across all sectors that had exposure to property. That’s the bit which is not cyclical in terms of being linked to the normal recession.”

It is clear that while banks have shown some forbearance and a reluctance to trigger insolvencies, they have been reassessing their problem debts in light of forecasts for economic recovery being pushed out until at least 2013/14.

But A&L Goodbody restructuring lawyer Michael Neill believes that after a particularly busy year for insolvencies in 2011, the market is changing.

“I think there is a sense of reality starting to dawn on banks, borrowers, advisers, on everybody involved in this process, that you can’t enforce on everything,” he said.

“You see this on the big ticket restructurings, where banks and borrowers approach it in a transparent, realistic and co-operative manner because, to be honest, everybody has too much skin in the game. There is a lot of work going on behind the scenes in the market to achieve consensual restructuring in the big big cases. It can be difficult to do that where your borrowers interest is just property.”

The recent cases of several big name property developers appearing in bankruptcy court bear this out, but Neill says companies should take confidence from the fact that restructuring of large organisations can be achieved – as in the case of the Quinn Group following Sean Quinn’s fall from grace.

“Success stories don’t hit the press but there are successful restructures out there. Quinn Group was one of them that did hit the news, but often consensual restructurings are confidential. But they are happening, especially at the big ticket level,” he explains.

Neill thinks banks are generally slow to take enforcement action against a corporate – with insolvencies proceedings often triggered by HMRC or other smaller unsecured creditors keen to recover their money. But he has noticed an increasing focus within banks to look back at transactions or money transfers done prior to an individual or corporate insolvency.

“It goes back to transparency, realism and cooperation. I think where a bank feels a customer has not been transparent or cooperative, it will be more motivated to take action. But I believe that the banks are becoming much more realistic than they ever were,” he adds.

John Young, a director in BDO’s restructuring team in Belfast, said that despite that realism there is concern for trading businesses among insolvency professionals because liquidity is not easy to come by and many firms have been using their cash reserves up over the last two or three years.

He sees potential for more trading businesses to fall over in the next 12 months, even as the economy begins to pick up.

However, he also notes that other companies have adapted to the market and transactions to purchase struggling firms are now happening.

“Restructuring is going on and when there have been occasions when businesses have gone into administration there have been buyers out there for those businesses as well. There has been a market for trading businesses even from the start of the recession,” he said.

“But any company has to look at its costs and what it needs to do given the turnover it is likely to achieve on a regular basis. What we are seeing quite often in this cycle is that it is those guys who haven’t sought advice or taken the radical steps early enough that are typically the ones facing the biggest problems. It is easy to say but you have to remember there are a lot of family businesses in Northern Ireland and for those guys it is an emotive decision to restructure or let staff go.”

Young too sees anything linked to property as a potential problem area.

“We’ve been through a period where a lot of the property companies have fallen into the insolvency process and on the back of that there have been calls made on personal guarantees and those are starting to work their way through the courts,” he said. “Trading remains difficult for pubs and retail is struggling, which is tied into property to some degree with rents.”

On a more positive note Conor Devine, who leads the GDP Partnership, thinks there will be an opportunity over the next 36 months for people to successfully restructure their debts if they approach banks in the right way.

GDP’s primary aim is to negotiate settlements for borrowers with the banks that all parties can live with.

“The big problem is that a lot of the debt problem here in Northern Ireland is property related. There are loads of cases where a client has a cracking family business and it is trading away and doing very well still, however they have got a couple of million pounds from the bank in 15 buy to let houses,” he said.

“Every case we go to the bank with is underpinned by a debt reduction strategy. The banks are businesses like all of us so when you go to them with a plan like that they are all ears. At some point with each case there will be a shortfall. If you put forward a two year strategy which will get them in a certain amount of money, then we will negotiate a settlement around the shortfall figure.”

Devine says that banks can’t sell property on the market, other than at “bottom of the barrel” prices, so it is in their interest to reach a deal that allows them to get as much as they can from borrowers.

“The property downturn won’t turn the corner until the debt problem is sorted out and we see some new money in the system through mortgage products and banks starting to lend again on property. So the advice we’d give to any borrower is that the sooner you put a proposal to the bank, the more there’s a chance they’ll stand by you and work with you,” he said.

While not everyone can be saved, he points out that in previous recessions, and for years in other countries, company restructures were a normal part of life: “Countries have restructured their debt, banks have restructured, so why is it a crazy idea that a borrower goes in and restructures his debt?”

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