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Tuesday, 9 November 2010

CVAs fall in the third quarter

Overall the number of company rescues through the company voluntary arrangement (CVA) mechanism fell during the third quarter of this year versus 2009. Indeed Q3 saw CVA’s in a massive 32% fall on Q2 of 2010. After a record high level of rescues using CVA’s in the first half of this year, the number of CVA rescues has fallen again, so what might be behind these changes?

Just as one swallow doesn’t make a summer one quarter’s insolvency statistics are not to be taken too seriously either, but the trend across all types of insolvency was a year on year AND a quarter on quarter fall in Q3. Has the worst of the recession gone? Will the number of corporate insolvencies continue to fall? Time will tell.

Back to those CVA’s numbers, which are something we study carefully at KSA. Breaking down the numbers - the manufacturing sector saw only 22 CVA’s in the period versus 32 in Q2. This is a fall of 31%, we suspect that manufacturing has bounced back in the last 9 months after manufacturers and OEMS’ began restocking and the mini boom for the automotive sector. Perhaps surprisingly even the construction sector, which has seen two high profile administrations in Connaught plc and Rok plc, saw a fall of 38% quarter on quarter.

Transport saw the only real rise in CVA use, interestingly currently KSA is working on three road haulage CVA’s. They blame the tight rates paid by retailers and lack of available finance to adequately fund their businesses.

A major impact on the use of CVA’s has been the threat of winding up petitions from HMRC. We have examined the number of winding up petitions issued in quarter 2 and 3 and did not detect much variance in these data. Our current view is that most directors will not consider the use of a rescue tool like a CVA, until the company is standing on the brink, typically a winding up threat by HMRC is the prod that is needed to make that decision.

Perhaps the number of threats to petition has fallen in prior quarter, leading to more companies relying upon deferral of tax and not the radical restructure that a CVA can lead to.

As champions of the CVA tool and the great changes that it can bring about in a failing business, we are disappointed that the use of CVAs has fallen back, but believe that a firmer approach by HMRC towards failed time to pay deals in 2011, will lead to more companies considering this option.

Without sounding like the proverbial doomsayer we at KSA think there is probably a false dawn here, very low interest rates, leniency on tax collection and support though HMRC’s time to pay scheme are not sustainable as the economy recovers. With government spending cuts and higher unemployment we would expect to see growth in the use of CVA’s and sadly liquidations in the transport, restaurants/hotels, retail and property sectors through 2011.

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