Economic Letter: New company registrations down on 2019, no evidence yet of rising corporate insolvencies

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  • New company registrations fell sharply across all sectors between March and May 2020, before rebounding over the summer, but remain below 2019 levels.
  • Despite evidence of significant financial distress among firms, there is no evidence as yet of a marked increase in corporate insolvencies.
  • Government supports, loan payment breaks, forbearance from other creditors, and pre-existing financial buffers have likely held down the insolvent liquidation rate.

The Central Bank of Ireland has today (19 November 2020) published an Economic Letter, written by Niall McGeever, Cecilia Sarchi and Maria Woods, entitled “Irish company births and insolvent liquidations during the COVID-19 shock”.

The Letter analyses trends in new company registrations (“births”) and insolvent liquidations since the onset of COVID-19 pandemic in March 2020. The severity of the COVID-19 shock and the modest liquid asset holdings of many Irish firms raises the question of how the pandemic is affecting business dynamism and failure rates. A marked reduction in new firm formation or a spike in insolvencies for viable firms could lower the productive capacity of the economy.

The authors find that new company registrations fell sharply between March and May 2020, before rebounding over the summer but remain below 2019 levels. Declines occurred across all sectors, but were largest in Accommodation & Food and Arts, Entertainment & Recreation. The heightened uncertainty at the onset of the pandemic may have led to fewer new firms being created and stalled investment decision-making by pre-existing corporate groups.

There is evidence in recent months of growth in registrations in the online and non-store retail sub-sectors, which suggests that certain sectors may be changing to meet altered operating conditions and consumer preferences.  Given the importance of new firms for employment, the evolution of firm registrations will be a key indicator to investigate longer-term structural trends at a sectoral level beyond the pandemic.

Despite evidence of significant financial distress among firms, there is no evidence yet of a marked increase in corporate insolvencies. Insolvent liquidations fell at the onset of the pandemic due to the inability of directors to convene creditors’ meetings safely, but returned to pre-pandemic levels over the summer. While insolvent liquidations typically rise as the economy deteriorates, the cumulative effect of government supports, loan payment breaks, forbearance from other creditors, and pre-existing financial buffers have likely held down the insolvent liquidation rate. The authors note that the insolvency trend documented in Ireland is similar to that experienced in other countries.

The outlook for insolvent liquidations is uncertain, and will depend in large part on the duration of the pandemic, and the support provided to companies. The indicators in this Letter will provide useful insights into business conditions in the coming months.

END