TIDMBEG
Begbies Traynor Group PLC
05 August 2022
5 August 2022
Critical financial distress rises, as companies face a
combination of economic threats
-- There has been a rise in the number of businesses in critical
financial distress over the last year, with a 37% increase in Q2 22
compared to Q2 21
-- Bars and restaurants, general retailers and construction
sectors are the major drivers behind this increase, with
year-on-year rises of 70%, 48% and 36% respectively
-- More than 582,000 companies in significant financial distress - flat on the previous quarter
-- A considerable increase in the use of County Court Judgements
to collect corporate debt - with CCJs in 2022 approaching the total
for the whole of 2021
The latest Begbies Traynor "Red Flag Alert" report, which has
provided a snapshot of British corporate health for the past 15
years, reveals the financial strain continuing to be faced by
thousands of British businesses.
The research revealed the number of companies rated as being in
"critical financial distress" continued to rise, jumping by more
than a third in Q2 2022 compared with the same period last year to
1,957, and edging up 3% compared to Q1 2022.
Businesses continue to be impacted by rising inflation in the
'real economy' which is far exceeding the official rate of more
than 9%. Taken together with higher labour, material and energy
prices, and combined with faltering consumer and business
confidence, companies are facing an exceptionally difficult
economic backdrop.
Adding further pressure to many companies is the repayment of
the Government-backed Covid support loans granted to help them
survive the pandemic.
Evidence of this financial distress comes in the form of County
Court Judgement (CCJ) data, arguably an early warning sign of
future insolvency, which revealed 46,235 rulings in the first six
months of 2022, up 5% on the first quarter, as creditors tried to
recover debts. This compares with 59,042 CCJs during the entirety
of 2021, with this year's figure to date driven higher as the
backlog in the courts clears and debts are pursued.
Sectors with the highest number of critically distressed
businesses;
-- Construction
-- Support Services
-- Real Estate
-- General Retailers
-- Automotive
-- Manufacturing
-- Bars & Restaurants
-- Financial Services
-- Food & Drug Retailers
-- Industrial Transportation
Julie Palmer, partner at Begbies Traynor , said the data on
companies in a "critical" financial distress painted a worrying
picture:
"Having emerged from the pandemic, many companies were hoping
for an economic boom but that has simply fizzled out, as supply
chain issues and the invasion of Ukraine have taken their toll by
driving up raw material and energy costs and reducing both business
and consumer confidence.
"We are now in a very high inflationary environment that's
piling pressure on businesses that were already weakened by the
shock of the pandemic.
"Sectors most exposed to discretionary consumer spending - bars
and restaurants and general retailers - are feeling the pain most.
Hit by staff shortages due to the latest spike in Covid rates,
their customers are now reining in spending on anything that's not
necessary, ahead of the expected hike in the energy price cap, and
we are seeing clear signs of this in this Red Flag data."
"I am also particularly concerned for those SMEs who operate in
energy-intensive sectors, such as manufacturing, as some could
simply become unviable. Without the benefit of an energy price cap,
business energy tariffs have at least trebled, and for many it will
be much worse."
Ms Palmer added that support from Government to prop up
businesses through the pandemic could also be artificially lowering
the number of businesses in critical distress.
She pointed to reports that the number of small businesses that
had failed to meet repayment terms for the Bounce Back Loan Scheme
(BBLS) was close to 200,000, almost double the most recent official
data.
Ms Palmer said: "There are firms that are struggling to work out
what they will do. Do they try to battle on or just throw in the
towel as they realise that in this new world, they just won't be
able to repay the taxpayer-funded help they got?
"Many are fighting on, but the environment is only going to get
worse, not better, at least until later next year or 2024. I fear
that it may be a troublesome autumn as businesses which have
struggled for so long are finally overwhelmed."
However, there was some good news. The number of businesses
rated as being in "significant distress" was flat on the previous
quarter at 582,452, and down 11 per cent on the same three months
in 2021.
Ric Traynor, executive chairman of Begbies Traynor ,
commented:
"The combination of macro-economic risks is now taking its toll
on UK businesses, as evidenced by this latest Red Flag Alert
data.
"With inflation nearing 10%, and showing little sign of abating,
there can be no doubt that things are going to get worse for UK
businesses before they get better. This, combined with a
deteriorating geo-political landscape, is likely to have serious
consequences for the UK economy.
"Rising insolvency rates, combined with our own evidence from
speaking to the directors of distressed companies, highlight the
impact of rising costs on businesses. The very same directors, who
benefited from Government-backed Covid support loans to get them
through the pandemic, are now telling us that they are simply
unable to repay these debts, plus they are having to deal with
rising wage demands and higher input costs.
"Additionally, the anticipated double-digit rise in business
rates next April will heap more pressure on to vulnerable
businesses, despite some benefiting from the recent
revaluation.
"With this latest research showing almost 600,000 companies in
significant financial distress, we would expect the weakest to
enter insolvency over the next two years."
--S --
For further information, contact:
MHP Communications:
Alan Tovey BegbiesCorporate@mhpc.com
Charles Hirst 020 3128 8193 / 07595 461 231
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.
The release refers to the numbers of companies experiencing
'Significant' problems, which are those with minor CCJs (of less
than GBP5k) filed against them or which have been identified by Red
Flag'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.
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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