There was a rare piece of positive business news in recent days amid the relentlessly gloomy financial and economic headlines of late.

New figures from Deloitte revealed that corporate insolvencies had fallen by almost a fifth in the first three months of this year. 159 companies were declared insolvent in the period, a drop of 18% on the same period last year.

That's been a consistent and welcome trend as we move further away from the 2008 financial crisis.

The problem is that we now look to be moving headlong into a new crisis of perhaps even bigger proportions, with a potential upsurge in corporate distress, a point noted by Deloitte.

"It's arguable that the current crisis has created the most significant challenge for otherwise viable Irish companies," David Van Dessel, Partner in the Financial Advisory division at Deloitte said.

"It may be the case that as the year progresses, the Irish business community will experience an increase in the utilisation of examinership as a process to facilitate corporate restructurings in companies with a reasonable prospect of survival."

Swift action

The Government was quick to introduce a range of measures when the Covid-19 crisis hit and companies were forced to close their doors and lay off staff.

The income support schemes cushioned the blow for businesses that could at least defer staff costs for a number of months.

A series of business supports were also introduced including the extension of two existing loan schemes administered by the Strategic Banking Corporation of Ireland.

Revenue suspended the charging of interest on late payments for a number of months and local authorities agreed to defer rates payments for the most immediately impacted businesses. Banks also introduced payment breaks on credit facilities.

However, the bills are still mounting, with everything from rent, insurance and loans having to be serviced.

A serious cash squeeze has ensued and many companies are not adequately capitalised to survive a sustained period of inactivity, sectoral groups argue.

A recent survey of over 1,000 businesses carried out by Chambers Ireland revealed that 6 in 10 had already discussed an extension of payment terms with creditors, including landlords, banks and the Revenue Commissioners.

It's not just overheads that are falling due. There are outstanding payments within the sector. The SME representative association, ISME, estimates that the average company owes €78,000 to other businesses.

"This suggests an inter-company debt of just under €11 billion throughout the economy," Neil McDonnell, CEO of ISME explained.

"This debt is owed to thousands of small businesses for food, drink, stationery, cleaning, accountancy, distribution, materials and much more. If it is not repaid, the viability of the businesses to whom the debt is owed will be fundamentally undermined. The domestic SME sector isn't highly profitable, which means many businesses will burn their remaining cash reserves quickly."

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Call for capital supports

ISME has called for the immediate introduction of working capital and liquidity supports for these companies, a call that's echoed by the retail representative group, Retail Excellence Ireland.

It argues that, without intervention, up to 110,000 jobs could be lost permanently in the retail industry.

This, it said, would cost the State an estimated €2.2 billion a year in increased social welfare payments and would cost the State an estimated €800 million every year in employee taxes foregone.

A similar point has been made by the head of the Irish Exporters' Association (IEA) who said there was merit in introducing a credit guarantee scheme or an export credit agency, citing the example of Germany and its move in that direction in recent weeks.

An export credit agency is a private or State backed institution that generally acts as an intermediary between government and exporters to issue guarantees for financing.

Simon McKeever, CEO of the IEA, reminded the Government that the export sector had been widely credited with kick-starting the recovery after the financial crash just over a decade ago.

He said the sector's performance would be vital to the quality of the recovery this time around too.

"A very large part of the economy is export driven. Demand will come back slowly, but we will need exports to bring the economy back to where it has been.

"Without a coordinated approach across financing it would be very difficult to get that back to level it's been at."

Capital support idea gaining traction

It's not just industry representative groups that have been calling for the introduction of such measures.

Davy's chief economist said there was merit in introducing a credit guarantee scheme in order to address cash flow issues among viable companies.

A report from Goodbody Stockbrokers earlier this week suggested that Irish bank investors were becoming increasingly nervous about the potential exposure of the sector to high levels of bad loans if it continues to lend to businesses without the types of credit guarantee schemes that have emerged elsewhere in Europe.

The Central Bank has indicated that work is underway to roll out some form of support. Governor Gabriel Makhlouf hinted at moves in this direction when he admitted in a blog this week that the banking system "on its own may be an insufficient source of liquidity" for small and medium businesses.

In a study published in recent days, the regulator looked at the extent of the demand for capital and the potential sources of such cash.

It estimated that the need for capital among SMEs in Ireland - outside of the agricultural sector - could be as high as €5.7 billion in the event of their revenue being curtailed for three months.

One positive finding in the report is that the number of SMEs without debt has increased since the previous financial crisis to just under 60% of all SMEs.

Such companies, the study points out, are generally more resilient to financial-sector shocks.

However, many of those companies, as a result of being debt-free, tend not to have a relationship with a financial institution.

And, as the report highlights, the ability and willingness of banks to lend to companies declines in times of financial distress.

In the event that finance from the private sector is not enough to meet demand, the authors examine a number of options, including credit guarantee schemes and even direct fiscal supports.

One of the positives of credit guarantee schemes, the report notes, is that if governments take on a sufficiently large share of the risk, banks can be encouraged to lend, despite the decline in risk appetite.

"However, there is a trade-off. Less risk-sharing creates larger contingent liabilities, and reduces banks' incentives to assess firms' long-run viability," it warned.

Among the fiscal supports it cites are grants and tax offsets which, it says, have benefits in their support to the economy, but there are issues including costs, targetting and 'moral hazard' - the concept whereby a business or individual is incentivised to increase their exposure to risk because they don't bear the full cost of that risk.

Danger ahead

Whether or not State-backed lending schemes emerge, it's inevitable that businesses will fall into difficulty in the period ahead.

Deloitte, in its insolvency report, said changes in circumstances as a result of the pandemic mean that we can reasonably expect an increase in activity as the year progresses.

However, the examinership process has been hindered by restrictions on movement in place at the moment, with the meeting of creditors, for example, being severely curtailed.

"In light of the current crisis, I think it would be an opportune time to amend the requirement for creditors meetings to be "only physical" and for a virtual option to be introduced," David Van Dessel said.

It's not the only change to the process being sought. ISME is calling for the examinership process to be overhauled and simplified, deeming the current process too expensive for most small businesses. That proposal is backed by corporate restructuring and insolvency specialist, Barry Lyons.

"Examinership needs to be dramatically simplified and made cheaper and more accessible to small and medium enterprises. The main suggestion is to remove the requirement for Court oversight with the attendant costs, while leaving the process subject to judicial oversight should that be needed," he explained.

ISME estimates that a typical examinership process could cost a business €80,000 and take 100 days to complete. Its proposal, it says, would reduce the cost to €15,000 and the time span to less than 70 days.

Regardless of the cost, it's likely more companies will be availing of the process in the months and years ahead.