I was at the ICAEW Insolvency & Restructuring Group Annual Conference in London earlier this week and took part in a panel looking at 'Breaking down barriers between participants in the insolvency process'. It was a good debate, and the whole conference had some excellent speakers and content, not least a presentation by Justin Urquhart Stewart on the global economy that was both insightful and highly entertaining. The reason for writing about the conference here, though, is that I had an issue with three views expressed by different presenters, with which I personally disagreed.
The first view was that the low rate of corporate insolvencies is likely to continue and unlikely to rise even when the economy starts to recover. I've had a long-held belief that insolvencies will spike when things get better and that remains my view. The demand for cash in struggling businesses will inevitably put them under more pressure and a greater likelihood of failure, and it will be accompanied by an environment in which the banks and other creditors will take a less tolerant view of businesses in distress. We were told that this recession is likely to be different from previous ones and the cyclical rise is less likely to happen. I disagree.
The second, from a politician, was that one of the prime reasons for the zombie companies about which we read (and I've written) so much is the failure of the banks to lend. I questioned the linkage he'd suggested and he clarified his point which was that the original failure to lend had created the shortage of working capital that had created the 'zombie state'. I acknowledge there will be some cases where having more working capital would have made the business stronger and allowed it to perhaps expand and thrive but, more generally, the problem must be that the underlying business model is flawed such that either turnover or profitability is inadequate to sustain the operation. Yes, we want the banks to lend more (to businesses that will be able to repay) but not if it means they will become a bigger write-off in due course.
The third was from an eminent senior banker who said he had yet to see a 'zombie company'. Maybe his definition is different to mine but I see, and hear about, plenty of businesses that are living from day to day covering the interest element of their debt with difficulty and knowing they are in no position to reduce the capital borrowing. And that goes for individuals too who are borrowing from one source to cover the minimum repayment on another.
I guess the value of conferences like this is that we learn, we hear different views, and we get the chance to challenge - or reinforce - our own thinking. I'm often wrong, indeed it's one of my well-known strengths, but I'm not sure I am on these issues.
The first view was that the low rate of corporate insolvencies is likely to continue and unlikely to rise even when the economy starts to recover. I've had a long-held belief that insolvencies will spike when things get better and that remains my view. The demand for cash in struggling businesses will inevitably put them under more pressure and a greater likelihood of failure, and it will be accompanied by an environment in which the banks and other creditors will take a less tolerant view of businesses in distress. We were told that this recession is likely to be different from previous ones and the cyclical rise is less likely to happen. I disagree.
The second, from a politician, was that one of the prime reasons for the zombie companies about which we read (and I've written) so much is the failure of the banks to lend. I questioned the linkage he'd suggested and he clarified his point which was that the original failure to lend had created the shortage of working capital that had created the 'zombie state'. I acknowledge there will be some cases where having more working capital would have made the business stronger and allowed it to perhaps expand and thrive but, more generally, the problem must be that the underlying business model is flawed such that either turnover or profitability is inadequate to sustain the operation. Yes, we want the banks to lend more (to businesses that will be able to repay) but not if it means they will become a bigger write-off in due course.
The third was from an eminent senior banker who said he had yet to see a 'zombie company'. Maybe his definition is different to mine but I see, and hear about, plenty of businesses that are living from day to day covering the interest element of their debt with difficulty and knowing they are in no position to reduce the capital borrowing. And that goes for individuals too who are borrowing from one source to cover the minimum repayment on another.
I guess the value of conferences like this is that we learn, we hear different views, and we get the chance to challenge - or reinforce - our own thinking. I'm often wrong, indeed it's one of my well-known strengths, but I'm not sure I am on these issues.
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