TIDMBEG
Begbies Traynor Group PLC
24 January 2023
Toxic Combination of Risks Afflict UK Businesses as
Concern Over a Surge in Insolvencies Grows
-- 610,405 businesses across the UK in 'significant' financial
distress, 4% higher than a year ago
-- 11% rise in critical and 24% surge in significant distress
levels compared to Q4 2019, show the legacy impact of Covid debt
and rising inflation
-- 23,885 Country Court Judgements (CCJs) served in final three
months of 2022; 52% up on 2021's level and 77% higher than
pre-Covid
-- Small companies especially vulnerable as repayments on COVID
loans bite, combined with cuts to energy bill relief and high
inflation, exacerbated by falling demand.
Businesses are struggling at an increasing rate as a combination
of legacy COVID debt, inflation and greater pressure on consumers
who are reining in spending, increasing the levels of significant
financial distress across UK companies, according to the latest
Begbies Traynor Red Flag alert report.
The report, which has been taking the pulse of British
businesses for more than 15 years, reveals the intense strain an
increasing number of companies are under as they are hit by rising
labour and materials costs, higher energy bills and an economy
likely heading into recession.
Julie Palmer, partner at Begbies Traynor, said: "What we are
hearing from directors of businesses is extremely distressing.
"We came into 2022 hopeful that the pandemic was fully behind us
and better times were ahead, only for Russia's invasion of Ukraine
to unsettle the global economy, leading to spiralling inflation and
soaring energy bills and laying the foundations for what looks like
a global recession. In the UK, in particular, strikes are just
piling on the pressure as staff struggle to get to work and
customers stay away.
"We're taking calls from company bosses who are having trouble
digging deep enough to keep battling on. They are already having to
pay back the support they took to get through Covid and,
anecdotally, we are hearing that both the Government and HMRC are
becoming more determined in pursuing debts, while other creditors
are increasingly turning to the law to recover their debts.
"Throw in a such a gloomy economic outlook, with inflation at
40-year highs and interest rates at levels not seen for 14 years,
and you can see why more and more companies are starting to feel
the burden of their debts, making directors question whether they
can go on."
Data from this latest Red Flag Alert research revealed a 36%
increase in number of companies rated as being in "critical
financial distress" in the final quarter of 2022, compared to the
same period a year ago, and 10% higher than in the preceding
three-month period. This is the sixth consecutive quarter that
businesses in critical distress levels have risen.
Red Flag Alert also found that there are 610,405 businesses
across the UK rated as being in "significant financial distress", a
rise of 4% on Q4 2021.
County Court Judgements (CCJs), widely seen as a leading
indicator of financial distress, are also climbing rapidly. There
were 23,885 CCJs in the final quarter of 2022, a 52% rise in the
level compared to the same period a year ago. Winding Up Petitions,
a much more serious legal action lodged by creditors, totalled 576
in the same period, a rise of 131% compared with 2021.
A clear measure of the distress businesses face today comes from
comparing the latest CCJ data against pre-pandemic levels - which
strips out the impact of Government relief packages and the
moratorium on legal action to recover COVID debts. In the final
quarter of 2019, the number of CCJs registered was 13,484, meaning
the latest number is 77% higher.
Ms Palmer added: "Considering what directors of businesses are
facing, I'm very surprised that we are not seeing more of them
finally giving up and shutting down. That so many are holding on in
the face of such strain is a testament to their abilities to manage
their way through incredibly tough times and a seemingly endless
run of fresh hurdles.
"Many of the companies captured by the Red Flag Alert are SMEs,
without the financial firepower larger enterprises have to fall
back on. We should be applauding the directors of these smaller
companies which make up the backbone of the UK's economy for the
incredible tenacity they have shown for so long."
Red Flag Alert's findings come at a time when the Government is
preparing to scale back help for companies struggling to pay rising
energy bills. When the new lower relief rates start in April, one
lobby group calculates that the average small business will get
GBP47 a year in government support, meaning that some SMEs could be
subject to energy tariffs at least three times higher than even
last year.
Critical distress levels among hospitality businesses surged
157% against last year's data. A high proportion of the fixed costs
of these businesses is energy related and there is concern that,
post April 2023, there could be a spike in insolvency rates in this
sector due to the modest level of Government assistance.
Additionally, many of these businesses will face further distress
as repayments on COVID-related debts become due. These factors
combined with falling consumer demand could wreak havoc on an
already vulnerable sector.
Ric Traynor, Executive Chairman of Begbies Traynor, commented:
"Although we are - hopefully - about to pass the peak of inflation
and the UK looks to have avoided recession at the end of last year,
the strain is very clearly showing on businesses, as insolvency
rates accelerate.
"Interest rate hikes look set to continue into Q2 2023 placing
further strain on the finances of both businesses and consumers.
This, combined with a far less generous business energy support
scheme and legacy COVID debts, do not bode well for many SMEs, and
I fear that failure rates will continue to rise well into
2024."
Top 10 Sector Ranking - Significant Financial Distress (Number
of Companies in Significant Financial Distress)
1. Support Services (94,868)
2. Real Estate & Property (86,892)
3. Construction (77,077)
4. Professional Services (42,033)
5. Telecoms (41,207)
6. General Retailers (38,068)
7. Health & Education (31,651)
8. Media (25,565)
9. Manufacturing (21,943)
10. Bars & Restaurants (18,905)
--S --
For further information, contact:
MHP Communications:
Alan Tovey 07833 437044
Charles Hirst 07595 461 231
BegbiesCorporate@mhpgroup.com
Notes to Editors
"Significant distress" is defined as businesses with minor CCJs
(of less than GBP5k) filed against them or which have been
identified by Red Flag Alert's proprietary credit risk scoring
system which screens companies for a sustained or marked
deterioration in key financial ratios and indicators including
those measuring working capital, contingent liabilities, retained
profits and net worth. "Critical distress" is defined as businesses
with minor CCJs (of more than GBP5k) filed against them.
In England and Wales, County Court Judgments (CCJs) are legal
decisions handed down by the County Court. Judgments for monetary
sums are entered on the statutory Register of Judgments, Orders and
Fines, which is checked by credit reference agencies to assess the
creditworthiness of individuals and businesses.
About Red Flag Alert
Begbies Traynor's Red Flag Alert has been measuring and
reporting corporate financial distress since 2004. It has become a
benchmark on the underlying health of companies across every sector
and region of the UK.
Red Flag Alert's algorithm measures corporate distress signals,
drawing on factual legal and financial data from a wide range of
relevant sources, including intelligence from the UK's leading
insolvency business, Begbies Traynor. The algorithm was refreshed
in Q3 2017 to enhance the risk factors analysed in the data. The
reported results have been backdated to ensure the consistency of
comparative data.
Red Flag Alert is commercially available to all businesses, on
an annual subscription basis, to help them better understand risk
and exposure and help prepare them for the future. Further
information about Red Flag Alert can be found at:
www.redflagalert.com
Economically active businesses exclude those that are flagged by
Companies House as being, Non-trading, Listed for Strike off /
Strike off pending, Insolvent or Dissolved. Companies, where there
is insufficient information available for RFA to assign a health
rating, are also excluded.
Begbies Traynor Group
Begbies Traynor Group plc is a leading business recovery,
financial advisory and property services consultancy, providing
services nationally from a comprehensive network of UK locations.
The group has more than 900 staff and partners and the professional
staff include licensed insolvency practitioners, accountants,
chartered surveyors and lawyers.
The group's services include:
-- Business recovery and financial advisory
-- Corporate and personal insolvency - we handle the largest
number of corporate appointments in the UK, principally serving the
mid-market and smaller companies.
-- Corporate finance - buy and sell side support on private company transactions.
-- Financial advisory - forensic accounting and investigations,
debt advisory, business and financial restructuring, due diligence
and transactional support.
Property advisory and transactional services
Valuations - valuation of property, businesses, machinery and
business assets.
Property consultancy, management and planning - building
consultancy, commercial property management, specialist insurance
and vacant property risk management, transport planning and
design.
Transactional services - sale of property, machinery and other
business assets through physical and online auctions; business
sales agency; commercial property agency focussed on northern and
eastern England.
Further information can be accessed via the group's website at
www.begbies-traynorgroup.com/investor-relations
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