Debt firms ready for flood of insolvencies

Published on Saturday 12 July 2008 14:24

DEBT companies are bracing themselves for a rush of business from September when the floodgates are expected to open on personal and corporate insolvencies.

With 1.4 million households timed to come off fixed rate mortgages by the end of the summer, and corporates experiencing one of their worst quarters in nearly a decade, debt companies are preparing for a boom in business after several difficult years.

Stephen Lightley, chief executive officer of Scottish debt solutions firm Invocas, said although the numbers of insolvencies in both sectors have so far been relatively tame, the pressure on individuals and businesses is now reaching breaking point.

"People assume it is going to break from September onwards. You just know it is coming. You can see it, smell it. We are an anti-cyclical sector, and you couldn't find a better sector to be in at the moment."

Invocas is tipped by analysts to make underlying pre-tax profits of 3.7m in the year to March 31, 2009, up from 3.43m last year, but Lightley indicated the firm is confident it can make a significant improvement on its most recent results.

"The numbers we are forecast to do next year are really just a drop in the ocean," he said.

Middle-class homeowners who previously used the value of their properties to raise capital or to secure loans are especially likely to come unstuck in the coming months, Lightley warned.

"People who in the past have used their house to make good unsecured borrowing – that is becoming much more difficult now, almost impossible."

Begbies Traynor, the UK's largest corporate insolvency firm, is predicting that more than 20,000 businesses will run into financial deep water this year.

It says corporate insolvency work has already increased by a third in the first six months of the year, and it is expecting to do markedly better than in 2007 when insolvencies reached an all-time low.

Before the liquidity crisis, businesses often succeeded in securing bank credit before having to go down the insolvency route.

But Lightley expects that while it will be boom time for debt companies, the banks could run into trouble in their retail banking divisions.

He said their tendency prior to the credit crunch to make 'debt management' arrangements with customers rather than go down the traditional route of drawing up individual voluntary arrangements, or protected trust deeds in Scotland, could leave them open to significant exposures in their retail divisions.

From an accounting perspective, debt management arrangements allow banks to say that debt is still performing, rather than having to write off the bad debt charge if it is put down as an IVA.

"They must have huge exposures," Lightley said. "If they are putting people in debt management rather than IVAs then they are hiding an even bigger problem. IVAs are just a false representation of the problem that is there."