The Domino Effect Of Corporate Failures, Late Supplier Payments

Despite ongoing turbulence from major global market events like Brexit and trade wars, the prevalence of business failures has actually declined across the world, new Dun & Bradstreet (D&B) data revealed. Researchers found new cause for optimism with findings that nearly half of all countries analyzed in D&B’s 2019 Global Bankruptcy Report saw a decline in the number of business failures between 2017 and 2018.

Yet, in the U.K., the report noted “a level of stagnation” in business failures, with the number of companies forced to shutter their doors dropping by only 0.3 percent year over year.

Dun & Bradstreet’s report was published just days before the Financial Times (FT) reported that investors are concerned about what could be a repeat of the Carillion collapse. Construction giant Kier had investors on edge after its newly appointed CEO Andrew Davies announced an upcoming $50.65 million decline in profits. Reports said that would mean the company would fall back into debt just a few months after raising $335.6 million.

A Carillion Repeat?

In the FT, commentator Matthew Vincent said Kier’s current financial position “smells horribly like Carillion.” However, unlike Carillion, Kier does not rely on only a few major clients for the majority of its revenue. Kier also remains profitable, and its CEO has deployed a new strategy to revive the company’s market position.

Still, analysts are concerned.

The Guardian reported on Monday (June 3) that shares in Kier dropped by more than 40 percent after the contractor issued its profit warning, similarly drawing comparisons to Carillion ahead of its collapse in early 2018.

“Kier is in a dark place,” said Brewin Dolphin Senior Investment Manager John Moore. “At the turn of the year, the business set out its financials, trading performance and future plans as part of its unsuccessful rights issue, only to now say that this information is largely wrong. It has broken trust with investors, which does not bode well. Comparisons will be made with the likes of Carillion and, indeed, Kier has lots of complex long-term contracts and individual subsidiaries, which makes for an opaque situation where clarity and stability are desired.”

The Share Centre‘s Investment Research Analyst Ian Forrest made similar remarks.

“The shares are now down 85 percent over the past year, and there are clearly fears in the market that the company could be heading for the same fate as Carillion,” he said.

The Supplier Payment Domino Effect

While Kier’s fate is not set in stone, fears that it could be a Carillion repeat are sure to irk more than a few investors. The collapse of Carillion had detrimental effects on its supplier base, as have other major corporate failures in recent months, including another construction conglomerate, Dawnus, cafe chain Patisserie Valerie and, in the U.S., Sears.

Indeed, there is a cyclical impact of vendor payments in relation to corporate failures that could force the dominos to fall down the supply chain. The failure of a major conglomerate like Carillion means late (or nonexistent) supplier payments, which can, in turn, force those vendors to close their doors and stop payments to their own suppliers, and so on.

Interestingly, according to D&B’s data, B2B payment terms in the U.K. actually improved, though they remain longer than Europe’s average of invoices being paid 13.4 days past due.

“Late or nonpayments from customers is often a contributing factor to business failure,” according to a press release.