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Dramatic Drop in Liquidation Statistics

28 June 2011 Credit Guarantee Insurance Corporation

The 72.1% year-on-year fall in May 2011 liquidations to 107 from 384 exceeded all of our expectations and although due largely to a 78.2% fall in voluntary liquidations, we caution against overt optimism as a consequence. It brought the YTD figure to a level of 1436 or 14.7% lower than in the first 5 months of 2010. Given this remarkable performance, there were only a few sectors that fared poorly in the January – May 2011 period:

* mining and quarrying saw 15 failures compared to the 8 seen in the first 5 months of 2010
* electricity, gas and water experienced 5 liquidations vs 3 a year earlier
* transport, storage and communication had 90 closures compared to 2010’s 54, reflecting very tight operating margins
* 247 liquidations were seen in the community, social & personal services industry vs 153 last year.

We have to treat the latest figure with incredulity given that Credit Guarantee’s leading default payment indicator for the first half of 2011 depicts a 14.3% improvement in the number of timeous payments and a 21.8% fall in the value thereof. If the May trend is maintained, it will represent the most significant development in sustaining the life of a company that this country has seen and we welcome any scheme that will ensure that overdues to creditors are settled within a reasonable period. Credit Guarantee’s overdue advised accounts reached an all-time high in 2009 and although they receded in 2010, they remained on a par with that seen in 1999/2000 in the aftermath of Asian debt crisis and the impact of local interest rates (prime) of 25.5%. The high base effects of 2009 imply that although the current trend is a welcome one, it masks to some extent the very difficult trading conditions to which many businesses are currently being subjected. It must be noted that liquidations is a lagging indicator and following on the slow administrative month in April due to the high number of public holidays – when reported failures fell over 25% - we would have expected to have seen a rebound in May’s figure. In fact this harks back to September 2007 when recorded liquidations rose 113% y-o-y following the public sector strike in the months just prior.

Just as the National Credit Act helped in keeping individuals out of sequestration, one beacon of light relates to that of business rescue and our initial expectation is that this mechanism may result in up to 20% fewer debt judgments and ultimately liquidations. Initially there may be an abuse of the situation whereby the sole means is as a delaying tactic for payments – perhaps leading to 30% fewer failures - and this may over-inflate the true longer-term effects of the new procedure. Weighed against this may be the attitudes of certain finance providers or trade creditors who are not prepared to wait years for payment proposals to erase overdues. Further, the ability of the (rescue) practitioner will be crucial in devising a coherent plan that creditors can agree to. A body of case law also needs to be established in order to more accurately assess the true potential of this new piece of legislation. The positive impact that lower payment defaults will have on liquidations and in turn on employment must not be under-emphasised. Even if the medium-term impact results in a 10-15% improvement, this would be a significant development.

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