To put 2019 in perspective we need to take a look back. In the 3rd quarter 2009, Credit Insurance losses on failed businesses peaked at £89m for the UK. This was the delayed effect of 2008’s bubble bursting and set a new record.
In the 2nd quarter 2018, losses reached £92m, another new record in the UK. Although losses were on some well know names (Carillion etc), the major failures stemmed from the supply chain into those failed
The UK economy is in the unenviable position where consumer demand is slowing, construction projects are not getting funded and the internet has squeezed the margins out of retail. As Construction and Retail are the
two lead sectors in the UK economy, their reduction will flow through to the rest of UK businesses.
Consequently, we are expecting 2019 to be a very poor year for company failures. As major buyers in the market place show declining financial strength, capacity (reflecting the reduced financial position) is also reduced, so it is getting harder to get cover. In 2018, the published figures for most UK companies will reflect what happened in 2018, so capacity will shrink further. UK SME’s need to start immediately mitigating against the risk of these failures given capacity constraints, especially if they have borrowed against their receivable assets, as in a sense, they have already taken the money.
Managing this risk over the next few years will be a life or death situation for many SME’s.
Retail 2018 – can be viewed as the Retail Year of Crisis. Total store closures between January – July amounted to 1644 v 629 in 2017. 1084 retail businesses went into administration and there were 257 CVAs.
The most notable administrations were: • House of Fraser • Poundworld • Conviviality • Toys ‘R’ Us • Maplin • Joe Bloggs • Fabb Sofas • Coast • Evans Cycles
As well as retail businesses entering administration a number entered Company Voluntary Arrangements. y Toys R Us December 2017 – Entered administration Feb 2018 y House of Fraser June 2017 – Entered administration August y Carluccio’s y Mothercare y New Look y Homebase y Carpetright y Prezzo y Jamie’s Italian y Byron Burger y Steinhoff Europe (commences 19th October)
Currently there are several retail companies which are on DP’s watchlist y Arcadia – Competitors have reduced cover, lack of current visibility. y Debenhams – Issued 3 profit warnings this year. Recently called in KPMG for advice. y Moss Bros – Swung to a £1.7m pre-tax loss in the first half of the year. y Paperchase – Pre-tax profits for year to January have reportedly fallen 90%. y Fenwicks – reporting a 93% decrease in annual profits, 408 jobs cut.
Ignoring the gloom, there are some strong performers in the retail sector. These include y Apple – became the first U.S. public company to cross the $1 trillion valuation threshold in August. y Amazon – became the second company to cross the $1 trillion valuation threshold this year. y Next – full price sales rose 4.5% in the first half of 2018. y Hotel Chocolat – revenues jumped 11% in the 52 weeks to July 1, while pre-tax profits increased to £12.7m. y HomeSense – TK Maxx sister brand will open 9 new stores this Autumn. y Pets at Home – shares jumped 18% in August following an 8.1% increase in group revenue to £277.4m (quarter ended July). y Primark – will see sales for the full year rise 5.5%. y ASOS – 4 months ended 30 June 2018, sales increased 22% with 18m customers (up 20%). y Boohoo – Full year 2018 results saw a 97% leap in revenue to £579.8m. Pre-tax profit rose 40% to £43.3m. Growth was aided by the acquisition of the PrettyLittleThing brand.
Food Retail As consumer demand stalls, premium food retail suffers. This is compounded by falling exchange rates forcing food prices up and increasing minimum wage increasing labour costs. Asda and Sainsbury solution’s is to join up (although the regulator is concerned), Tesco’s solution is a new store format, Jacks (with concerns it will simply cannibalise its own sales), Tesco’s issues also reflected in its very poor Moody’s Credit Rating, Caa (defined by Moody’s as: of poor standing and a very high credit risk). Aldi and Lidl still expanding and eating into the big 4’s margins. Convenience stores fared well as consumers shopped locally for drinks and barbecue supplies. Co-op’s sales increased 8.5%, its fastest rate since 2011
Automobiles The Government has confirmed its ambitious plans for at least 50% of new cars to be ultra-low emission by 2030.
New Car sales have dropped due to new emission regulations.
Porsche stopped taking orders for diesel cars in February following the diesel emissions cheating scandal that hit parent company Volkswagen AG in 2015.
Jaguar Land Rover has moved 2000 staff at its Castle Bromwich plant to a 3 day week until Christmas, citing Brexit uncertainty and sliding sales of diesel cars. JLR has also announced 3rd qtr losses and is now planning a reduction in capital spending and concentration of manufacturing away from the UK.
BMW plans to shut its Mini plant for a month after the UK’s official departure from the European Union to minimise the impact of a no-deal Brexit that it fears would cause a shortage of parts
Construction There is growth in the construction industry (2018 TD 2.9%), but this is being compounded with legacy contracts, a reduction in funding, lack of skilled labour and the precarious position of some of the largest construction companies.
Laing O’Rourke waiting for their refinancing from HSBC. Currently they are overdue at companies’ house and are not expecting their accounts to be filled until the end of the year, subject to refinancing. Without that, the company is not a going concern.
The Migration Advisory Committee (MAC) has advised the Government to restrict the number of lower-skilled EU workers to enter the UK after Brexit.
Temporary Construction Recruitment is of particular concern, with escalating losses making the sector unprotectable. Constructing companies are using the temps to manage their cashflow by taking 60-90days payment terms.
Oil & Gas With higher oil prices, the sector is doing well, however, prices are being driven by reducing supply which is in turn been driven by Political reason. This means that there is much greater volatility and can results in shocks, as seen in low oil process over the last few years. Oil prices have hit a four-year high of over $84 a barrel after Saudi Arabia and Russia rejected calls by Donald Trump to increase production.
Sales of Iranian crude have fallen as buyers remain wary of penalties from U.S imposed sanctions due to take effect from November. Those fears have sent crude oil prices higher.
Oil & gas companies are diversifying into power generation and battery manufacturing due to digitisation and electrification. Royal Dutch Shell, BP, Total and Repsol are some of the key companies at the forefront of the deployment of electric vehicle technology over the next 2-5 years
Steel In June, the US introduced 25% tariffs on EU steel. So far, the EU has retaliated with tariffs on US goods, including bourbon whiskey.
The EU has introduced a series of tariffs to prevent steel “dumping” from China, Russia and other countries.
The employers’ organisation, UK Steel, said a new regime for policing this would be unlikely to be fully in place by March when the UK leaves the EU, leaving British steel vulnerable.
Around 8,000 people are directly employed in the Welsh steel industry, including at Tata on Deeside and more than 4,000 in Port Talbot – which is the largest steelworks in the UK.
British Steel British Steel has just announced it is to cut 400 jobs from its worldwide operations
Country Risk It is worth noting countries that are considered as areas of risk by the Underwriters. These are Turkey has now been downgraded and is now off protection. The Turkish currency and debt crisis of 2018 is an ongoing financial and economic crisis. It is characterized by the Turkish lira plunging in value (30% against the $), high inflation, rising borrowing costs (many companies borrowed in $’s), and correspondingly rising loan defaults
Greece exited its third bailout in August. In exchange for the money, Greece agreed to drastically cut spending and implement painful economic reforms. Consumer spending plummeted, unemployment spiked, and many businesses shut down. The Greek economy is now three-quarters of the size it was in 2007, before the crisis started. Public debt is forecast to peak this year at over 188% of GDP Underwriters are avoiding buyers heavily dependent on bank financing
UAE continues to see increase payment delays, fraud and claims in this market. The squeeze on liquidity by local banks has led to businesses seeking to replace working capital funding through extended supplier credit The UAE ranks as one of the worst countries for debt collection
China–United States trade war
China and the United States are locked in an ongoing trade war as each country has introduced tariffs on goods traded with the other. A further tariff on $200 billion of Chinese goods went into effect on September 24, to which China plans to respond to with tariffs on $60 billion of US goods.
The timing of a trade war between the world’s two largest economies is not favorable for China, as China’s economic growth momentum has slowed down significantly, and the risk of a credit crisis has increased.Tags: business, credit insurance, credit market, Debtor Protection, economy, invoice finance, market, supply chain Categories: Information