Dip in Blighty's titsup tech firms... but what about the ZOMBIES?

Reseller failures stabilise but as recession lifts, a shuffling and a moaning is heard

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An eerie calm has descended in the UK technology channel* as company failures stabilise and the recession lifts, but with legions of undead corporate corpses stalking the land, an insolvency storm could now be brewing.

That was the prognosis of experts in the credit and insolvency sectors, a week after UK GDP figures from the Office for National Statistics showed year-on-year growth in Q3 of 0.8 per cent, up on the 0.7 per cent in Q2.

There is even talk of interest rates being pushed through earlier than planned though the Bank of England governor Mark Carney warned a week ago that the economic recovery "lacks traction".

The latest stats for calendar Q3 are in from credit reference agency Graydon UK and it shows that 74 firms hit the wall in the three-month period, one less than a year ago and down on the 89 in Q2.

"Insolvencies are no longer a problem in the IT sector relative to other industries. Things have certainly stabilised," Alan Norton, head of intelligence at Graydon told us.

During the first nine months of 2012 some 228 channel businesses hit the skids, and the figure for the same time span in 2013 is 227, the Graydon data revealed.

But Norton said history showed that insolvencies rise as economies emerge from recession, as businesses over-trade, take their eye off the cost base and simply run out of cash.

The difficulty that arises as the UK exits the last five-year crisis is that the number of "zombie" businesses - those just paying interest on debts but not the capital - could have a profound impact on sustained prosperity.

The highest profile example of this in the channel was collapsed integrator 2e2, which went under owing creditors more than £400m. Its demise was far-reaching and led credit insurer Atradius to unleash a zombie-hunting task force.

Staggeringly low interest rates for the last six years and "increased creditor forbearance" has allowed these businesses to stagger on, said Julie Palmer, partner at Begbies Traynor according to reports.

"As unemployment rates fall fast, under Bank of England rules interest rates could rise as early as 2014. Even if they go up by only 0.5 per cent, insolvencies could increase sharply," she said.

The insolvency practitioner found more than 432,000 corporate undead in Britain when studying its scoring systems, up 16 per cent on 2010 and at a four-year high.

Insolvency trade body R3 estimates 18,000 businesses in the financial, property, and business services sectors (which include the IT industry) are only able to cough interest payments.

An R3 spokesman told The Channel that the current trend is for falling business failures but added "we’re still playing 'wait and see'."

"The ‘zombie’ phenomenon will have an impact on the numbers: rather than the insolvency spike that you’d normally get after a recession, we might well see a longer, lower crest in insolvencies as it’s taking longer for struggling businesses to be ‘shaken out’ of the economy," he said.

The recession did not clear as much of the dead wood as it should, said Jon Moutlon, a veteran of private equity circles and chairman at Better Capital.

He does not expect interest rates to rise, as much as he'd like them to, but warned when that does happen the outcome will be bloody, and that he is maintaining a watchful vigil with some businesses "within our sights". ®

* The tech channel constitutes all organisations, big and small, that provide services or sell products on behalf of a software or hardware vendor. These include everything from systems integrators, original equipment manufacturers, resellers, value-added resellers and managed service providers to distributors and consultants.


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