Policy for distressed businesses must be targeted, scalable, and equitable in post-pandemic environment

• Central Bank research finds that, at its peak in mid-2020, 30% of active companies claimed Covid-19 wage subsidies. This had fallen to 10% by Q1 2022.
• Persistent wage subsidy claimants were more likely to be vulnerable coming into the pandemic, with higher levels of pre-pandemic leverage and lower liquidity.
• Policy measures to address potential post-pandemic insolvencies should be targeted to ensure the survival of viable businesses. They must also be capable of dealing with a potentially large increase in caseload, should it emerge.

The Central Bank has today (11 October 2022) published two Financial Stability Notes. The research examines the use of Covid-19 wage subsidies by Irish companies. It also explores the issues policymakers are likely to face as they look to address financial distress among businesses in a post-pandemic environment.

The first paper, “Wage subsidy utilisation by Irish companies” is authored by Derek Lambert, Niall McGeever, and Eoghan O’Brien. It finds that, at its peak in mid-2020, some 30% of active companies were claiming the wage subsidy. This figure had declined to 10% as of Q1 2022, when the last data were available. There are three main cohorts of claimants - those that claimed in 2020, but never again (approximately 36% of claimants); those that claimed in 2020, before gradually transitioning off the payment in 2021 (around 34% of claimants); and those that remained on the subsidy throughout the pandemic (around 24% of claimants). The Note also finds that persistent claimants tended to have higher levels of pre-pandemic leverage and lower liquidity, both at the median and on average. This suggests that these companies were more vulnerable to financial shocks even before the pandemic.

Businesses in the Accommodation & Food and Other Services sectors had the highest share of persistent claimants. 37% and 35%, respectively, of companies in these sectors were still claiming the subsidy in Q1 2022. Overall, 60% of Accommodation & Food businesses claimed the subsidy at some point between 2020 and Q1 2022. 

Looking at the exposure of retail bank and non-bank lenders to claimants, 24% of Irish non-financial corporate balances at retail banks were owed by companies claiming the wage subsidy in mid-2020. For non-bank lenders, this figure was slightly higher, at 32%. However, these shares had declined significantly to 9% (retail bank exposures) and 7% (non-bank exposures) as of Q1 2022. The Note also shows that the usage of wage subsidies across sectors broadly aligns with banks’ usage of forbearance on business loans. 

The second Note published today, “Enterprise policy issues for distressed businesses following the unwinding of pandemic supports”, is authored by Fergal McCann and Niall McGeever. It examines policy options to address insolvencies and restructures, which are likely to increase as pandemic supports have wound down and liabilities (such as deferred tax payments) are increasingly falling due. The Note references previous Central Bank research indicating that around 4% of Irish businesses may have remained financially distressed into 2022 as a result of the pandemic. This does not consider additional distress that may emerge due to inflationary pressures. 

In this context, the Note underlines that any policy measures must be targeted, scalable, and equitable in order to meet potentially large volumes of distress, should that materialise. Measures must be targeted so that firms with viable economic futures can be channelled towards restructuring rather than liquidation, and any initiatives put in place must be capable of dealing with potentially large numbers of firms without the need for lengthy consideration or primary legislation. Measures must also be equitable, in that it must not leave firms that have been meeting their liabilities throughout the pandemic at a relative disadvantage (for example, the forgiveness of deferred tax liabilities may leave those firms that paid taxes on time at a disadvantage). 

Looking at policy options, the Note finds that the Small Company Administrative Rescue Process (SCARP) is particularly well-designed based on findings from a review of international experience, in that it can provide a low-cost method of restructuring liabilities and a mechanism for dealing with multiple creditors in a coordinated manner. However, it highlights a number of potential risks associated with a widespread and rapid adoption of SCARP. These include the capacity of the system to deal with unexpectedly large inflows of distressed cases due to latent underlying distress in the SME population; the possibility of creditors challenging proposals in court; difficulties the smallest companies may face in funding professional fees; and the importance of ensuring the full engagement and participation of all creditors, in the context of the opt-out clause available to the Revenue Commissioners. Considering alternative options, the Note finds that bilateral restructuring options between individual creditors and their debtor have benefits in being deployable quickly, but may be difficult to coordinate among multiple creditors. Equity-like options for businesses needing to restructure liabilities and rent arrears arbitration present alternative and positive options, but may also be problematic in terms of scalability.

Notes to Editor

“Wage subsidy utilisation by Irish companies” uses novel company-level data to study wage subsidy utilisation by Irish companies during the pandemic, determine the characteristics of those companies that were still claiming the subsidy in Q1 2022, and measure the exposure of the financial sector to wage subsidy claimants.

“Enterprise policy issues for distressed businesses following the unwinding of pandemic supports” discusses the options available to policymakers to address a potentially large volume of business distress that may emerge as the unwinding of Covid-19 pandemic supports and continuing inflationary pressures expose latent distress among a cohort of businesses.

Research Technical Paper – “SME Viability in the Covid-19 Recovery” (McCann, McGeever, Yao) - Vol. 2021, No. 9

Financial Stability Note – “SME Credit Conditions in the Pandemic Recovery” (Durante, McGeever) – Vol. 2022, No. 2

Financial Stability Notes – Full Series