Posted: Tue Aug 07, 2007 10:22 am
Grant Thornton warns that drop in personal insolvencies is not the turning point
Commenting on the continuing problem of personal debt, Mike Gerrard, Head of Personal Insolvency at Grant Thornton, said, "It may look as if personal insolvencies have finally reached a plateau, however evidence points to a peak still being someway off. The existing mountain of debt still stands, consumer spending remains unabated and there is a strong likelihood of more interest rate rises, not to mention previous ones still having to filter through the system, which will cause more individuals to resort to bankruptcies and IVAs."
Gerrard says there are many factors which force individuals into seeking a bankruptcy or IVA: "At its most basic it's about having unmanageable levels of unsecured debt which, through interest, gets progressively worse. People scramble for a while to pay it off and more often then not end up throwing in the towel, overwhelmed by the sheer scale of the problem."
Unexpected increases in the cost of living is all it takes to tip individuals over the edge. One key factor that has undoubtedly fuelled personal insolvencies has been the gradual rise in interest payments on a typical variable rate mortgage as seen over the past five years.
"In the space of five years, repayments on an average variable rate mortgage have risen over 65% and it is these frequent increases that can act as a trigger, making serviceable debt unmanageable for many people." Gerrard continues, "In 2003 an individual with an average mortgage of £99,02932 and an interest rate of 3.75% would have paid £3,713 per annum. Today, with interest rates at 5.75% and the average mortgage at £140,44732, costs have risen to £8,075pa, equivalent to 35% of an individual's average gross earnings3 and an increase of £4,362 since 2003."
"In our experience, many individuals are running up credit card debts of £60,000 to £70,000 plus - often with interest at 20% plus. If servicing this debt was not already a tall order, it is not difficult to see how finding an extra £4,362 a year to service a mortgage, higher utility bills and taxes are plunging more people into insolvency. Some increases may be small, but collectively that is all it takes to tip the balance in insolvency cases," says Gerrard.
Further evidence that the problem of personal debt is still a way from being resolved came today from statistics issued by the Council of Mortgage Lenders. In the first six months of the year, 14,000 properties were taken into possession, rising by nearly 18% compared with the previous half-year, and nearly 30% compared with the first half of 2006.
"While still historically low, house possessions are decidedly on an upward trend, largely fuelled by more and more people defaulting on their mortgages because of excessive levels of unsecured credit they can't manage", said Gerrard.
Mark Allen, Grant Thornton's Head of IVAs, said that although the amount of IVAs remains a large figure, there has been a distinct slow down in their growth compared to the previous quarter: "IVAs have dropped by 15% on the previous quarter and less than a percent when compared to the same period last year. This can be partly attributed to a tougher stance being taken by some creditors and also a slowing down of marketing activity by some of the larger IVA providers."
However, Allen believes the IVA industry is close to adopting a fee structure and code of practice which will align fees of IVA firms to the return to the creditors, increase the payments to creditors and provide much needed stability to this industry.
"The establishment of an industry norm will create a consistency in the market which has not existed before, and ensure that the debt repayment process involved in an IVA is transparent and addresses the concerns of creditors, the debtor and the insolvency practitioner," says Allen.
Corporate insolvencies:
There were 3,032 liquidations in England and Wales in the second quarter of 2007. This was a decrease of 2.1% on the previous quarter and a decrease of 4.2% on the same period a year ago.
Of greater interest is the drop in the number of administrations, typically involving larger corporate entities, which for the quarter fell 19% from 699 in Q1 to 565 this quarter. Q2's administration levels also represent a drop of 13% on the same quarter last year.
Recent benign economic conditions have certainly played a key part in seeing corporate insolvency levels fall to their lowest levels in just over two years (Q1 2005), however, "We don't expect the downward trend to last," said Simon Longfield, a restructuring partner in Grant Thornton's Recovery and Reorganisation department.
"Recent years have seen the fuelling of a restructuring culture - corporates with labyrinthine debt structures that would have traditionally forced them out of business being re-financed and rescued thanks to strong liquidity levels. However, lending conditions within the UK debt restructuring market are increasingly contracting with costs rising, lenders beginning to tighten their covenants and being more risk averse than just a few months ago."
"With lending conditions showing early signs of tightening it is inevitable that more corporate insolvencies will follow unless management teams are quick to react with realignment strategies - the extent of these will be directly proportional to how radical and firm this process is set to become," said Longfield.
The UK lending bubble has by no means burst but the realisation of a starker reality is undoubtedly setting in. "The market has been awash with covenant light ("cov-lite") loans and highly leveraged deals led by the private equity community. What we are witnessing is not yet the turning of the tide but certainly a realignment of lender policy and strategy which will make it harder, for many, to restructure their debts," he continued.
Cost is also a major issue with average lending costs rising by more than a quarter over the past two years, and by over 60% since 2003.
Commenting on the market in general, Longfield said, "Over the next year I expect the resolution of restructuring deals to be more challenging. The likelihood is that a higher proportion of debts will not be re-financed on terms similar to those experienced in the last couple of years, adding to the likelihood of more corporate insolvencies. I expect retail businesses and bars and restaurants to feature at the sharp end, mainly as a result of the economic effects caused by the recent and protracted bad weather and to the effects of continuing pressures on consumer spending levels."
Source: creditman.biz
Please post any news stories about IVAs here:
http://www.iva.co.uk/forum/default.asp?CAT_ID=5
See my Blog:
http://ivanews.blogs.iva.co.uk
Commenting on the continuing problem of personal debt, Mike Gerrard, Head of Personal Insolvency at Grant Thornton, said, "It may look as if personal insolvencies have finally reached a plateau, however evidence points to a peak still being someway off. The existing mountain of debt still stands, consumer spending remains unabated and there is a strong likelihood of more interest rate rises, not to mention previous ones still having to filter through the system, which will cause more individuals to resort to bankruptcies and IVAs."
Gerrard says there are many factors which force individuals into seeking a bankruptcy or IVA: "At its most basic it's about having unmanageable levels of unsecured debt which, through interest, gets progressively worse. People scramble for a while to pay it off and more often then not end up throwing in the towel, overwhelmed by the sheer scale of the problem."
Unexpected increases in the cost of living is all it takes to tip individuals over the edge. One key factor that has undoubtedly fuelled personal insolvencies has been the gradual rise in interest payments on a typical variable rate mortgage as seen over the past five years.
"In the space of five years, repayments on an average variable rate mortgage have risen over 65% and it is these frequent increases that can act as a trigger, making serviceable debt unmanageable for many people." Gerrard continues, "In 2003 an individual with an average mortgage of £99,02932 and an interest rate of 3.75% would have paid £3,713 per annum. Today, with interest rates at 5.75% and the average mortgage at £140,44732, costs have risen to £8,075pa, equivalent to 35% of an individual's average gross earnings3 and an increase of £4,362 since 2003."
"In our experience, many individuals are running up credit card debts of £60,000 to £70,000 plus - often with interest at 20% plus. If servicing this debt was not already a tall order, it is not difficult to see how finding an extra £4,362 a year to service a mortgage, higher utility bills and taxes are plunging more people into insolvency. Some increases may be small, but collectively that is all it takes to tip the balance in insolvency cases," says Gerrard.
Further evidence that the problem of personal debt is still a way from being resolved came today from statistics issued by the Council of Mortgage Lenders. In the first six months of the year, 14,000 properties were taken into possession, rising by nearly 18% compared with the previous half-year, and nearly 30% compared with the first half of 2006.
"While still historically low, house possessions are decidedly on an upward trend, largely fuelled by more and more people defaulting on their mortgages because of excessive levels of unsecured credit they can't manage", said Gerrard.
Mark Allen, Grant Thornton's Head of IVAs, said that although the amount of IVAs remains a large figure, there has been a distinct slow down in their growth compared to the previous quarter: "IVAs have dropped by 15% on the previous quarter and less than a percent when compared to the same period last year. This can be partly attributed to a tougher stance being taken by some creditors and also a slowing down of marketing activity by some of the larger IVA providers."
However, Allen believes the IVA industry is close to adopting a fee structure and code of practice which will align fees of IVA firms to the return to the creditors, increase the payments to creditors and provide much needed stability to this industry.
"The establishment of an industry norm will create a consistency in the market which has not existed before, and ensure that the debt repayment process involved in an IVA is transparent and addresses the concerns of creditors, the debtor and the insolvency practitioner," says Allen.
Corporate insolvencies:
There were 3,032 liquidations in England and Wales in the second quarter of 2007. This was a decrease of 2.1% on the previous quarter and a decrease of 4.2% on the same period a year ago.
Of greater interest is the drop in the number of administrations, typically involving larger corporate entities, which for the quarter fell 19% from 699 in Q1 to 565 this quarter. Q2's administration levels also represent a drop of 13% on the same quarter last year.
Recent benign economic conditions have certainly played a key part in seeing corporate insolvency levels fall to their lowest levels in just over two years (Q1 2005), however, "We don't expect the downward trend to last," said Simon Longfield, a restructuring partner in Grant Thornton's Recovery and Reorganisation department.
"Recent years have seen the fuelling of a restructuring culture - corporates with labyrinthine debt structures that would have traditionally forced them out of business being re-financed and rescued thanks to strong liquidity levels. However, lending conditions within the UK debt restructuring market are increasingly contracting with costs rising, lenders beginning to tighten their covenants and being more risk averse than just a few months ago."
"With lending conditions showing early signs of tightening it is inevitable that more corporate insolvencies will follow unless management teams are quick to react with realignment strategies - the extent of these will be directly proportional to how radical and firm this process is set to become," said Longfield.
The UK lending bubble has by no means burst but the realisation of a starker reality is undoubtedly setting in. "The market has been awash with covenant light ("cov-lite") loans and highly leveraged deals led by the private equity community. What we are witnessing is not yet the turning of the tide but certainly a realignment of lender policy and strategy which will make it harder, for many, to restructure their debts," he continued.
Cost is also a major issue with average lending costs rising by more than a quarter over the past two years, and by over 60% since 2003.
Commenting on the market in general, Longfield said, "Over the next year I expect the resolution of restructuring deals to be more challenging. The likelihood is that a higher proportion of debts will not be re-financed on terms similar to those experienced in the last couple of years, adding to the likelihood of more corporate insolvencies. I expect retail businesses and bars and restaurants to feature at the sharp end, mainly as a result of the economic effects caused by the recent and protracted bad weather and to the effects of continuing pressures on consumer spending levels."
Source: creditman.biz
Please post any news stories about IVAs here:
http://www.iva.co.uk/forum/default.asp?CAT_ID=5
See my Blog:
http://ivanews.blogs.iva.co.uk