January 2024 Newsletter: Stubborn inflation refuses to rule out recession

January 24, 2024

Just when we thought UK inflation was steadily on its way down, and the retreat becoming a central support of the government’s pre-election road to rehabilitation, then comes the first disappointing figure for ages: a rise from 3.9% to 4.0% between November and December.

The obvious fear is that it will be followed by news in February that the economy shrank in Q4 last year, after a tiny fall back in Q3, triggering the ‘two negative quarters’ definition of recession.

Even at 4.0%, inflation is still twice the Bank of England’s target, which until now had averaged 2.0% in the Bank’s 25 years of independence. The surge in all sorts of prices in the last 18 months has pushed it to 2.4%, more expensive alcohol and tobacco having been blamed for the latest twitch upwards.

Energy prices in the next couple of months will be critical in determining the Bank’s mood towards the timing of eventual interest rate cuts. Although petrol pump prices seem to yo-yo in line with headline news about conflict in the Middle East, energy prices overall are easing and a lower price cap is widely expected in April.  Nonetheless, rate-setters are more interested in core inflation, still based on a broad prices index, but with volatile items such energy, food, alcohol and tobacco stripped out (unchanged at 5.1% in December). It also considers inflation in the services sector (which firmed from 6.3% to 6.4%). By contrast, core inflation in the US is 3.9%; in the Eurozone, 3.4%.

Aside from the scourge of more expensive debt, one day-to-day problem for UK employers is proving hard to shift: growth in pay overall continues to outstrip headline inflation; it’s the result of complex dynamics in the labour market, yet there will be no clear resolution in the foreseeable future. Businesses shouldn’t hold their breath for brighter days.

Insolvency storm is a long way from blowing over

The hardest impact on businesses of inflation and high interest  rates is magnified by the 2,002 businesses forced into insolvency in December 2023, up 2% on the same month last year and still above pandemic levels. The vast majority (86%) were Creditors Voluntary Liquidations (CVLs) – directors throwing in the towel  while they could still make the decision. Compulsory liquidations hit 256, a shade higher than in September and continuing the surge in winding-up petitions presented by HMRC for unpaid tax. Construction remains the worst-hit sector, representing 17% of all insolvencies in December 2023. Expect CVLs to remain at pre-2020 levels for the foreseeable future, while for others, HMRC’s Covid-related forbearance continues to fade from memory.

Individuals operating close to the financial edge may face the same fate, although insolvencies for individuals fell 20% on an annual basis in December, apparently owing to a decline in the number of Individual Voluntary Arrangements which were replaced by bankruptcies and Debt Relief Orders.

All debtors, business and personal, must be proactive in seeking advice and engaging with creditors:

  • Explore and exhaust all possible restructuring options before reaching for a CVL – your business may be capable of gaining a second wind, with the right breathing space
  • Stay on the front foot with HMRC. Engage and explore a time to pay arrangement. Being unresponsive only aggravates tax authorities and hastens legal action
  • Revisit repayment profiles for loans and propose realistic, achievable amendments. A loan that remains serviced, albeit differently, is still profitable for a lender.
  • Consider the moratorium framework to gain a short period of “breathing space” while pursuing a rescue or restructuring plan. During this legal moratorium no creditor action can be taken against a company without the Court’s permission.
  • For personal debtors, explore the Debt Respite Scheme to allow time to address your situation. Information on this, as well as debt support for those in poor mental health, is available here.

Dealing with significant creditors, such as HMRC, banks and landlords, is a complex process to be navigated carefully. Businesses negotiating with these parties might consider professional advice and representation.  

Electric van pioneer runs out of juice

Arrival, the troubled electric van maker based in Britain and listed on Nasdaq, is no stranger to winding-up petitions from various stakeholders. The company now has administrators lined up in case its quest for rescue funding fails, and its one-time market value of £4.2bn has slumped to just £20m.

The valuation issue is key here. Arrival was one of a wave of electric vehicle companies that capitalised on huge investor demand during the last tech boom to raise money at valuations in the billions. This new mini-sector has had a bumpy ride: Volta Trucks filed for insolvency, while others, such as Tevva Motors, have struggled to raise further capital.

It might be argued that a good proportion of tech investors, particularly those aged under 50, are fair-weather punters whose careers may have been built (and sometimes fortunes made) against a generally benign economic environment. But their investee companies  face a higher cost of capital for the foreseeable future and those whose business models have relied on artificially low interest rates face tough times ahead. Valuations are also problematic: those of private equity and venture capital investors in tech have only gone one way, unhindered by wider economic woes and, in some cases, lack of near-term returns. For those businesses requiring bank debt, lenders’ margins over central bank rates have widened, so options for funding investment and growth have shrunk.

That said, the long term picture for UK tech remains very positive. As home to eight of the world’s top 50 universities, companies can access a healthy pool of skilled talent, and research and development programmes. There is no shortage of software engineers on these shores. Success in starting, scaling and selling UK businesses has been proven. London’s Silicon Roundabout, Canary Wharf’s Level 39 and other major cities, notably Bristol, Cambridge, Manchester and Cardiff, have produced several impressive tech and engineering start-ups,  many of which have already been snapped up by large US or Asian corporates.

UK growth companies need to be nimble and ready to take quick action if they want to secure their longevity, which means being prepared on a number of fronts:

  • Data-ready for fundraising – financial content for Information Memoranda
  • Efficient structures for founders and directors
  • Support for tech grant applications
  • Assisting in communications and negotiations with lenders
  • Advice on R&D allowances
  • Recognition of complex revenues
  • Treatment of Intellectual Property and intangible assets
  • Advice on structuring strategic alliances and major contracts
  • Scaling strategies
  • Due diligence on potential transactions

These don’t just apply to first-timers. Successful tech businesses are resilient and able to ‘pivot’ or reinvent themselves in a global industry with seemingly endless possibility and diversity –  internet security, Software as a Service, (SaaS), Platform as a Service (PaaS), carbon-ion batteries, trading platforms, e-commerce and telecoms solutions, to name just a few that we have worked with at Buchler Phillips.

Care homes forced to take it easy

The long term outlook for the care home sector is, in theory, encouraging: steady growth of 1% year-on-year, for as far as analysts can forecast, is based on an ageing population globally combined with increasing income levels and faster growth in specific conditions requiring care, notably dementia. In the UK, a relatively high 80% of care homes are privately operated, some in large chains typically owned by private equity, while a large proportion remains fragmented among small, independent outfits. For all of these homes, the short-to-medium term outlook is troubled by more than higher energy costs. Tighter regulation and monitoring, hikes in staff costs supported by the National Living Wage and a fall in immigration from countries previously plugging a large gap for care workers have all conspired to slash profitability.

Operators running a very small number of homes – maybe even just one – are particularly exposed. They don’t have access to a large corporate balance sheet, nor to further funds secured on their property, particularly while interest rates show no sign of easing. It’s no surprise that care home insolvencies rose 30% in the 12 months to last June.

As ever, the insolvency toolkit offers options for care home operators seeking to grip their problems and steady their businesses. A Creditors Voluntary Arrangement (CVA) may buy some breathing space while management considers large, specific issues such as landlord negotiations when the main trading property is leased. If liquidation and closure is the answer, then a CVL may be pursued by the directors, although professional help is crucial in managing  the process: winding down a care home business is hugely complex, given the number of stakeholders involved – not least the residents, many of whom may be in very poor health.

There are presently 3.2 million people in the UK aged 80 or older. The figure is expected to grow four-fold by 2041. Care homes are clearly becoming an increasingly important sector but  the scale of fallout in tough times will grow accordingly while the financial profiles of such businesses remain in their present form.

As ever, the Buchler Phillips approach to business challenges is ‘workout, not bail out’. Don’t hesitate to get in touch for an exploratory chat if your business needs help. Addressing the cracks now will, in many cases, avoid the need to start again.

Our helplines below are open for free initial consultations.

Jo Milner                           07990 816904

David Buchler                  07836 777748

Let’s get to work!


About Buchler Phillips

Buchler Phillips is an independent, UK based corporate recovery and restructuring firm, with an impeccable Mayfair heritage dating back to the 1930s.

Led by David Buchler, former Europe and Africa chairman of global consultancy Kroll Inc, our senior team is equally comfortable advising large corporations, Small & Medium Enterprises (SMEs) or individuals. In addition to decades of experience, each of our Partners brings to any given assignment unique independent insight, free from conflicts of interest, that is often sought but rarely found by clients or co-advisors.

The firm is sector-agnostic, but has particularly strong credentials in property; financial services; professional services; leisure and hospitality; retail and consumer; UK sports; media and entertainment; transport and logistics; manufacturing and engineering; technology and telecoms

Our activities fall broadly, though by no means exclusively, into financial restructuring, including fraud and forensic investigations; operational restructuring and turnaround; expert witness services and recovery solutions for corporates and individuals.

This newsletter is published for the purposes of general information only and does not constitute advice. Any action taken by readers upon the information above is entirely at their own risk.

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