Profit warnings in 2021 reached one of the lowest points in two decades, but a restructuring adviser warns that insolvencies could rise this year as the stresses of the pandemic catch up with businesses no longer receiving government support. 

 

New data by consultancy EY-Parthenon shows that 203 FTSE firms issued profit warnings last year, standing for 12.9% of UK listed companies – the second lowest by number and the fourth lowest by percentage in 22 years. 

 

However, EY said that 2021 was “a year of two halves, where depressed expectations and a post-lockdown recovery led to record low warning totals in the first half, followed by a rapid increase in downgrades in the second”. 

 

In the fourth quarter, profit warnings increased back to normal levels, led by retailers (7), aerospace and defence (6) and personal care, drug and grocery stores (6). These three sectors also showed the highest percentage of companies warning in 2021, with 57% of FTSE aerospace and defence companies, 39% of personal care, drug and grocery stores and more than a third (34%) of FTSE retailers. 

 

 

Growing demand for goods, energy, and labour and the availability of goods and employees from mid-summer meant UK-listed companies issued 50% more profit warnings in the second half of 2021 than the first. A record proportion of warnings blamed supply chain disruption (44%) and increasing costs and overheads (27%). 

 

In Q2, 16% of warnings cited supply chain disruption, rising to 29% in Q3 and eventually 44% in the last quarter, compared with just 2% of warnings blaming supply chains between 2009 and 2019. 

 

“We expect to see an increasingly differentiated picture to emerge in 2022, as businesses feel the full force of any earnings stresses, and as funders increase their focus on Environmental, Social, and Governance (ESG) metrics as they look to focus on sustainable businesses,” the report notes. 

 

It adds that median investor reaction to company profit warnings rose to 13.4% in the fourth quarter, the highest level for two years, as companies face growing scrutiny from investors, activists and regulators. 

 

“The growth in importance of ESG factors means that lenders could be looking at a business with a different lens now, compared with their previous financing,” the report observes, adding that the decision to support a business will increasingly intersect with the viability of the borrower’s ESG strategy. 

 

“The next restructuring cycle will be like no other in terms of the scrutiny applied to decisions and processes,” EY-Parthenon argue. “There is a risk that an underclass of borrowers develops that cannot access mainstream funding. Alternative lenders have already emerged to serve this market and expect private equity and other funders to play an increasing role. But strategically important assets may require support from government or from their supply chains to remain viable.”