Welcome to the February 2017 Newsletter
Welcome to our February 2017 newsletter. As we write, we are in the early weeks of Donald Trump’s presidency, and already the rule book on international relations, trade and diplomacy has been torn up leaving the world trying to get to grips with how this most unpredictable of US presidents is going to reshape modern politics and commerce.
In the run up to Trump’s inauguration, the mood was positive on international stock markets. The Dow Jones Industrial Average surged to historic highs on the promise that lower US corporate taxes would lead to higher equity dividends, and the expected massive US government spending on large infrastructure projects would deliver much anticipated new jobs and wealth for US blue collar workers.
But the big question is, how long will markets stay positive and are equities already fully priced? The US travel ban has already spooked financial markets, causing the FTSE-100 to fall to a month’s low and the pound giving up all of its recent gains just a day after its imposition.
A new report by influential economic think tank the Resolution Foundation has decided the party is already over in the UK.
While living standards improved significantly between 2014 and the start of 2016, as low inflation rubbed shoulders with rising wages and employment, the recent big Brexit-led rise in inflation to 1.6pc, and the prospect of lower growth in people’s income, means the feast is already over. It estimates that incomes in working-age households are currently growing at the slowest pace since 2012-13.
The Bank of England released its latest inflation and GDP forecasts last week and although the Bank has sharply increased its UK growth forecast for the year to 2%, this optimism was tempered by warnings of uncertain times ahead. As Mark Carney put it, ‘The Brexit journey is really just beginning. While the direction of travel is clear, there will be twists and turns along the way’.
In this issue, we showcase some key research we co-produced in October with Opus Restructuring, an advisory, restructuring and insolvency firm. We looked into the effectiveness of company administrations, the UK’s flagship business rescue procedure, and found some worrying results.
Later in this newsletter we return to a regular research topic for Company Watch: the largely parlous health of the UK care home sector. We first looked at the state of this important market sector in August 2013 and have tracked it regularly ever since.
In addition to bespoke research projects, we have again been strengthening our European services, this time for Poland and Italy. Below we give more detail.
Turning to Company Watch news, I’m pleased to announce that Jo Kettner has returned from maternity leave and is taking on a new role as Deputy CEO. Jo will initially be focussing on product development and working closely with the Business Development team.
We would also like to welcome back Mike Newman as Business Development Director. After nine months away, Mike has re-joined the Business Development team with a focus on key client account relationships and sales.
We hope you find this newsletter of interest and welcome any feedback.
Two thirds of businesses going into Administration fail
It’s the UK’s best known and most well-regarded business rescue procedure, but our co-report found that it is ineffective in over two thirds of cases.
Working with Opus, we reviewed the outcomes of 4,581 Administration cases in England & Wales which started in the past five years. Almost 2,000 of the Administrations are still in progress.
2,607 Administrations were completed within five years, but far from being a rescue vehicle, 90% (2,344) of companies were in fact formally liquidated or dissolved. High profile failures have included the likes of Comet, Blockbuster and La Senza.
Only 263 (10%) of companies emerged from Administration and remain active. These companies tended to be focussed in the hotel and property development sectors.
Seventy five (29%) of the surviving firms used the successful implementation of a Company Voluntary Arrangement (CVA) as the exit route. A significant number of these were football clubs, such as Portsmouth, Hearts and Dunfermline Athletic.
It is likely that up to 513 (22%) of the Administrations ending in Liquidation or Dissolution may have involved the rescue and long term survival of the business through a Pre-Pack sale or a sale following a period of trading (a Trading Administration).
If these are added to the known successes, the total number of positive outcomes rises to 776 and the success rate for Administrations from 10% to 30%.
Our research also confirmed that a surprisingly high number of Administrations last longer than the one year period contemplated by the relevant insolvency legislation.
Out of the 1,960 companies still in Administration, 757 (39%) had been in the process for more than a year and 301 (15%) had been in Administration for more than two years. Property companies feature heavily among these, as well as some highly complex financial services businesses, such as MF Global and the failed international law firm, Dewey & Leboeuf.
Care homes at risk of failure because of government underfunding
Our joint report revealed a raft of major financial problems besetting care home operators. The sector is bedevilled with underfunding, which at best will lead to compromises in care standards and at worst threatens a significant number of homes with closure or new ownership.
Using our data, Opus reviewed the finances of 6,178 care home operators, who collectively run 96% of the UK’s residential care homes (caring for around 300,000 elderly and vulnerable residents).
We found that more than one in four (1,718) of operators are at risk of failure, meaning that around 6,000 care homes could need a financial rescue within the next three years if their closure is to be avoided.
At the moment, it’s unlikely that the number of formal insolvencies will rise sharply because most care homes are transferred to new owners by agreement with the creditors, thereby avoiding closure. However, unless public funding improves, it is questionable whether the sector has sufficient management or financial resources to cope with a surge in the number of homes being threatened with closure.
The entire sector earned annual profits of only £209m, a return on capital of 3.3%. Moreover, these figures cover periods before the introduction of the National Living Wage last April. We estimate that this will add over £400m to labour costs, threatening to make the sector loss making overall. It is highly unlikely that operators will be able to raise fees to cover this extra burden.The average annual profit per care home earned by operators is only £10,000. This is clearly insufficient to support the investment required to keep up with the rising care standards required by the Care Quality Commission or to justify the operational and financial risks involved. Anecdotal evidence suggests that many operators are looking to exit the sector, making the capacity shortage already being caused by the ageing baby boomer generation worse still.
Surprisingly, only 15% of operators borrow any significant amounts, but this minority have extraordinary levels of debt, equivalent to 121% of their net assets, well outside financial norms. The sector as a whole borrows £4.5bn.
There are significant regional variations within the sample. Scotland has the best financial health ratings, the Midlands has the worst. The South East has the most profitable operators, the North West has the least successful. Wales has easily the most dangerous levels of gearing, while London has the lowest.
Enhanced Company Watch coverage of Polish and Italian companies
We have increased the number of Polish and Italian companies available online to track and analyse. Customers can now access full financial Company Watch health assessments of all private Italian & Polish companies including profit, asset & funding management evaluation and full financial trend analysis.
In addition to annual financials & ratings, you can view other important business details such as group structure, directors & shareholders details, and a range of supporting information. Uniquely Company Watch’s system, enables you to perform “what-if” analyses on individual companies – generating updated health scores and credit limits providing you with the latest picture of a company’s financial health.
COMPANY IN THE NEWS: Scientific Digital Imaging (SDI) announce soaring interim results
Scientific Digital Imaging recently announced impressive interim results for the period to 31 October 2016, which saw revenue rise by 33% year-on-year to £4.9m
SDI designs and manufactures scientific and technology products for use in life sciences, healthcare, astronomy, manufacturing and art conservation.
“As can be seen from the Company Watch Health Profile, SDI’s growth had been flat for a number of years, until introducing a new strategy in 2014 to advance through a series of carefully selected, complimentary acquisitions such as Opus Instruments and Sentek. The strengthening portfolio is reflected in the company’s H-Score which has risen to a near perfect 99/100.”
We were delighted to sponsor the Chartered Institute of Credit Management Credit Insurance Specialst of the Year Award.
Warmest congratulations toCredit & Business Finance, who emerged as the worthy winners.
Congratulations are also due to the winners of our prize draw.