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The great paradox of this recession is how few firms have gone bust. Here we are with the most abrupt and severe downturn since the depression of the 1930s, and yet businesses seem to be surviving it far better than anyone had predicted and with a remarkably low rate of major-name casualties. Woolworths has gone but among high-profile firms, even in the vulnerable retail sector, that is about it.
So surprising has this been that Lombard Street Research, the City research boutique that has a notable record so far for correctly calling this downturn, was moved a few weeks ago to produce a report celebrating the strength of the British non-financial sector. It noted that the resilience of balance sheets and profits in this country was not only much than the performance seen in competitor countries such as France and Germany but it was also by a country mile better than corporate performance in the recessions of 1992 and 1982.
This it attributed in part to alert and financially sophisticated management which took early prompt action, and in part to the flexibility of the labour force, which had co-operated in short-time working, job-sharing and a whole range of measures that allowed for rapid cost-cutting.
This upbeat picture does, however, jar somewhat with research from financial information service Debtwire, which found that of all the distressed corporate assets in Western Europe, the UK accounted for a quarter. It had 24% of all distressed companies this year while Germany had 14%, Italy 12% and France just 6%.
It is not rocket science to work out, however, that this level of pain is a direct consequence of Britain having led the way in leveraged buyouts in good times, when people who should have known better injected levels of debt into companies that have proved quite unsupportable in the current tougher conditions.
These divide into poor businesses with too much debt and good businesses with too much debt. The former flounder on because no one wants to pull the plug on them, and then be forced to recognise their losses. They prefer to look the other way and hold their noses.
The latter are gradually being refinanced by the lenders — the banks — usually with them agreeing to swap a large chunk of debt for equity. Typically, the terms massively dilute the existing shareholders and allow the banks to jack up their fees on the remaining debt to levels that would have made Al Capone blush. They get away with it because none of the companies is willing to complain publicly about what is going on.
But though there is a steady stream of restructuring like this, there is still less than one would expect — perhaps because the most overstretched deals done at the top of the market have still not come round for refinancing. Most of the debt raised for big private-equity deals does not mature until 2013 or 2014, but when it does it should be fun. The industry is going to have to roll over or otherwise refinance hundreds of millions of pounds of debt in companies that have almost no chance of ever being able to pay it back.
That, though, is a joy to come. People talk about the imminent arrival of distressed debt funds, which will mop up the best of these overgeared creations, replacing the original private-equity players, many of whom have been notably useless in this crisis. But there is no real sign of them yet, just as there has been very little sign of the distressed funds in commercial property, which is another area where one would expect to see swathes of forced selling, given what has been going on there.
The truth is, however, that there have been very few distressed debt purchases. There has been very little property on the market, and what there has been — like Credit Suisse's Canary Wharf building — has gone for prices that are far more than a distressed investor would be prepared to pay.
What people want to know now, of course, is whether this is as bad as it gets or whether this is just a phony recession which will soon be replaced by the real thing.
Market purists say this cannot be the bottom because we have not had a real sell-off where everyone loses faith in capitalism and prices plumb to levels where the last person leaving the country is told to turn out the lights. It is only then, they say, that the market will clear and a firm base will be established to rebuild.
On the other hand, this does seem masochistic. Very little of this recession has unwound as people expected, so there is no golden rule which says that is how events have to turn out. It is true, as economist Joseph Schumpeter ruefully observed, that these times are supposed to be periods of creative destruction. But the optimistic view perhaps is that the more creative we can be, the less we might have to destroy.
