At the end of Q2 2016, the Insolvency Service estimated that 3,617 corporate and SME companies entered insolvency, a number that is 2.7 % lower than the same period in 2015. For personal bankruptcies, the estimate is that 3,537 bankruptcy orders were granted which is 11.2 % lower than the same period in 2015 and the lowest since Q3 1990.
However, unlike the corporate and SME sectors, total personal insolvency, including bankruptcy filings, Debt Relief Orders (DRO) and Individual Voluntary Arrangements (IVA), was up 22.4 % from Q2 2015. The lower personal bankruptcy filings were offset by higher DROs, which were 15.6 % higher in Q2 2016 versus Q2 2015, and IVAs which were 42.7 % higher in Q2 2016 than in Q2 2015.
To tell us more about trends within consumer and SME insolvencies in the UK and the implications for credit grantors, Finance Monthly interviewed Andrew Berardi – PRA Group Europe’s Managing Director for UK Insolvency Investment Services.
Why have corporate and SME insolvencies fallen?
One needs to dig deeper into the corporate insolvency figures to find possible clues. For instance, one statistic shows that Compulsory Liquidations, where a credit grantor pushes the company into a bankruptcy or winding up order, decreased by 14 % between Q2 2015 and Q2 2016. Also, total company liquidations stand at the lowest since comparable records began in 1984. It is clear from the figures that credit grantors are giving their corporate and SME clients “breathing space” and in some instances, providing a life line by re-writing loans, finding additional financing, and even forgiving some loan principal.
The resurgence of Private Equity after the financial crisis has also provided a lifeline to struggling entities through funds designed specifically to invest in turnaround situations. The Insolvency Service website in the UK also publishes interesting statistics regarding insolvency by specific industry types; construction and retail/wholesale trade seem to have the highest incidents of insolvency proceedings.
A final statistic, and one not included in the official corporate insolvency statistics, is that companies entering liquidation after administration have risen by 33 % from Q2 2015 to Q2 2016. As trading conditions get tougher, this could be a harbinger for a rise in future corporate and SME insolvency proceedings.
What is driving the changes in personal insolvency filings in the UK?
Despite the fall in personal bankruptcy filings, overall consumer insolvency filings are on the rise. The statistics show that the fall in bankruptcy filings is confluent with the rise in DRO filings. In October 2015, the DRO protocol was relaxed so that consumers with £20k in debt (£15k in the previous DRO protocol) and £1k in asset (£300 in the previous DRO protocol) could access the DRO protocol. The relaxing of these guidelines has resulted in greater access to the DRO protocol for a population of consumers who may have otherwise had to petition for a bankruptcy as their only viable debt forgiveness option.
However, the causes for the rise in IVA filings are less certain. Evidence suggests that the IVA protocol has been marketed to a broader range of consumers who are now aware of the many benefits of an IVA as compared to other forms of debt forgiveness arrangements. Additionally, changes in the regulatory landscape may mean consumers are being directed away from unregulated Debt Management Plans (not considered insolvency) and increasingly advised to consider a regulated debt forgiveness scheme such as IVAs. Regardless, the increase in IVAs cannot be ignored.
What should credit grantors do to maximize recoveries on credit products defaulted due to insolvency?
Recoveries on insolvency proceedings can be lengthy and unpredictable, and in the case of DROs, credit grantors should not expect any recovery. Whether your customer is an SME or consumer, it is important for credit grantors to engage in the process by:
- Engaging with the insolvency practitioner, bankruptcy trustee, or administrator appointed to the case.
- Processing and responding to the paperwork in a timely and accurate manner.
- Lodging your proof of debt along with supporting documentation such as statements, invoices, etc. where and when requested.
There are specialist service providers who can assist your department with these tasks for a fee. Another way to maximize recoveries may be to sell the insolvencies to an FCA regulated specialist debt purchaser such as PRA Group.
How can PRA Group assist UK credit grantors to maximise their recoveries from SME and Consumer insolvencies?
As a highly respected and recognised global leader in the purchase of nonperforming personal and SME credit products, PRA is also one of the industry leaders in purchasing many types of consumer and SME insolvencies including IVAs; CVAs – an IVA for SMEs; Trust Deeds – the Scottish equivalent to an IVA; and bankruptcies.
With insolvency purchasing capabilities in the UK, Germany, U.S., and Canada, there is a good chance your organization can benefit from PRA’s insolvent debt purchasing expertise. Our insolvency team consists of industry veterans who are highly regarded for their ability to structure debt purchase solutions that are customised, compliant, and transparent.
What are the key considerations to make when managing acquisition of bankrupt and insolvent consumer debt? What are the most common challenges that you are faced with?
Sellers of insolvent consumer debt should be clear on the internal strategic purpose for selling insolvent debt. As indicated above, insolvency proceedings can be administratively burdensome for an internal recovery operation and therefore many sellers like the idea of a “forward flow” whereby the buyer assumes the administrative responsibility of managing the insolvency. Some sellers simply prefer to enter into periodic “spot sales” to fill a recovery gap or accelerate the recovery from the insolvency. In being clear on the strategic purpose, PRA can then structure a purchase solution right for the Seller. Another common challenge we have as a buyer of insolvent debt is the quality of the data. Certain insolvency-specific data (such and insolvency start date and insolvency type) is important to ensure the best price. Given PRA’s extensive experience with these debt types, we are often able to supplement seller data through our data warehouses, which ensures the best possible price for the seller.
As a thought leader in this segment, how are you developing new strategies and ways to help your clients?
We are very much an active participant within the insolvency industry, which, in my opinion, assists everyone in the insolvency chain. Throughout the regions we operate, PRA maintains strong working relationships with Trustees, Practitioners, regulators, creditor liaisons, and consumer advocacy groups. In the UK, PRA maintains representation on the standing IVA working committee. In the US, we have implemented a hybrid “service to buy” solution, which gives sellers the best of both solutions.
- In 1993, Andrew joined Bear Stearns Companies Inc. to help establish and grow a first ever debt purchasing platform for consumer insolvencies in the United States.
- In 2003, while still with Bear Stearns, Andrew moved from New York to London to build and grow a first ever debt purchasing platform for consumer insolvencies in the United Kingdom.
- In 2014, Andrew joined the PRA Group after a 5 year period working with a boutique investment advisor where he established the first ever Private Equity style fund dedicated exclusively to the purchase of consumer insolvencies in the UK.
Food for Thought
What would be your top 3 tips for going the extra mile?
- Be as clear as possible regarding objectives and the desired outcomes
- Surround yourself with talented people and give them guidance and autonomy
- Endeavour to be two steps ahead of the competition
What does a typical day in the office look like for you?
At some point, one’s career evolves to where there is no typical day in the office. However, every good day involves some combination of strategic dialogue, data analysis, and client centric activity … all in the same day.
What inspires you to press further into your work?
Mentoring younger people who are passionate about building the business and building their career within PRA Group. I very much enjoy meeting our clients and ensuring the business is doing everything it can to meet their needs. Last, but not least, I enjoy one on one meetings with Insolvency and Turnaround professionals who are passionate about rescuing small business, and, for those practicing on the personal insolvency side, passionate about helping consumers to resolve their debt problems and move forward with their lives.
Andrew always has plenty of time to speak to those who have a shared interest in trends within the insolvency market or wish to better understand PRA’s debt purchase capabilities.