The direct economic impact of business failures will be in the range of €3-4 billion in 2023 and possibly higher if larger companies begin to encounter some financial distress, according to PwC's first quarter 2023 Insolvency Barometer.
It reveals that there was €1.8 billion of debt owing from businesses that failed last year, with the average debt per SME approximately €2m.
The top 10 companies comprised over 50% of the total direct economic impact of all the business failures in 2022. 85% of this impact was from companies based in Leinster.
The overall business failure or insolvency rate is expected to move closer to the long term average and back towards the 2019 pre-pandemic figure of 850 insolvencies.
However, the Barometer warns that this could rise above 1,000 if a global recession takes hold.
Ken Tyrrell, PwC Ireland Business Recovery Partner, said: "On average, just over one company is currently failing every day in Ireland. By comparison, in the years following the global financial crisis, over five companies a day were failing.
"This illustrates the low business failure rate at present but also the potential for business failures to increase if economic conditions worsen in 2023," Mr Tyrrell said.
The Barometer further reveals a 39% increase in actual business failures in 2022 (to 527 companies) when compared to 2021 (379 companies). This represents 20 business failures per 10,000 companies in 2022 compared to 14.4 in 2021.
At the same time, the business failure rate increased significantly by 57% in Q4 2022 when compared to the same quarter in 2021 (6.6 per 10,000 in Q4 2022, up from 4.2 per 10,000 in Q4 2021).
Business failure rates showed an average quarterly increase of 27% in 2022.
However, current insolvency levels are still well below pre-pandemic levels. Ireland's current business insolvency rate is running at 18% of the peak rate in 2012.
While there was a significant increase in 2022, the 2019 pre-pandemic rate was nearly twice as high at 36 per 10,000 (848 companies in 2019) and compares to an annual average of 53 business failures per 10,000 over the last 18 years.
This long term average equates to approximately 1,000 business failures per year, far higher than the 2022 level of 527 companies.
SMEs were the main driver of insolvencies
99% of all 2022 insolvencies were SMEs, leaving debts of approximately €2m per SME on average.
Almost one in 10 insolvencies in Q4 2022 were either a SCARP or an Examinership appointment. The new SME restructuring option accounted for 4% of the total insolvencies in 2022 with 23 SCARP appointments.
Lenders relatively quiet on the restructuring front
There was little change in the annual business failure rate for lender initiated receiverships in 2022 (78) compared to 2021 (81). All other 449 insolvencies were voluntarily initiated by the companies themselves or by other creditors.
Business failure rates in construction and real estate are expected to increase
Continued elevated rates of business failures are expected in 2023 in the job intensive hospitality and arts, entertainment & recreation sectors. Similar to trends in the UK last year, an increase in business failure rates within the construction and real estate sectors is also expected.
In 2022, the arts, entertainment and recreation sector had the highest number of insolvencies with 73 per 10,000 companies. The rate of insolvencies in the hospitality sector nearly trebled to 46 per 10,000, up from 17 in 2021.
Energy and utility companies faced a difficult year, with the overall insolvency rate nearly doubling from 22 per 10,000 in 2021 to 43 per 10,000 in 2022. The sector also had the highest rate of business failures in Q4 2022 with 33 per 10,000 companies.
Dublin, Cork & Galway account for two-thirds of all business failures
For the second year running, Dublin had the highest number of business failures per 10,000 companies (28). Dublin, Cork and Galway comprised nearly two-thirds of all the insolvencies in 2022.
The gap in the liquidation rate between Ireland the UK is closing
While the UK liquidation rate is nearly three times higher than in Ireland, the gap is closing. The UK and Ireland’s equivalent liquidation rates have reduced from a multiplier of 3.0 to 2.4 in the last quarter. This gap could reduce further in 2023 as historic insolvency data suggests that liquidations in Ireland tend to lag behind the UK.
"With economic headwinds remaining driven by high inflation, energy costs and interest rates, in our view, there will continue to be significant pressure on the profitability and cash flow of many businesses through the early part of 2023 at least," Mr Tyrrell said. "The focus should be on performance improvement and cost reduction with a view to cash generation and preservation."
He said Ireland will continue to see most of the distress arising from SMEs and particularly small businesses, adding that SCARP will continue to gain traction. "Alongside examinership, we expect to see continued increase in the use of the SCARP process during 2023. Investment will be critical for a good success rate within these restructurings and access to capital could well be tougher in 2023."
"Companies must re-appraise and shore up their liquidity and working capital requirements to address the unwinding of government support and debts accrued during the pandemic, while meeting renewed customer demand and delivering delayed investment.
"With economic headwinds continuing, revised and flexible business plans will be required to allow for quick forecasting and reacting to market changes. Robust data driven reporting will enable a fast response to changes and prevent profit leakage."
