TIDMBEG
Begbies Traynor Group PLC
01 November 2017
Business distress on the rise ahead of interest rate
decision
c.450,000 UK businesses now suffering from 'significant'
financial distress; up 27% year on year
Ahead of Thursday's decision by the Monetary Policy Committee on
whether or not to increase interest rates, new research from
Begbies Traynor, the UK's leading independent insolvency firm,
reveals that nearly half a million businesses across the UK are in
a state of 'Significant' financial distress, even before the
effects of a potential interest rate hike are felt.
According to Begbies Traynor's Red Flag Alert research for Q3
2017, which monitors the financial health of UK companies, 448,011
businesses were experiencing 'Significant' levels of financial
distress at the end of the quarter, up 27% compared to the same
period last year (Q3 2016: 352,552); a worrying statistic that
could increase still further should interest rates rise this
week.
The research highlights that almost 250,000 of these companies
(Q3 2107: 248,619) ended the period with negative net worth,
representing a sizeable population of so called "zombie" companies
that have managed to survive thanks to the prolonged low interest
rate environment and flexible labour market, but which do not have
adequate working capital to fund any growth or absorb rising input
prices.
Begbies Traynor warns that with the prospect of an interest rate
rise alongside increasing employment costs, due to changes in the
minimum wage combined with HMRC's crackdown on personal service
companies (often set up to avoid employers' national insurance),
many of these struggling companies will not have the reserves
available to survive.
The research also shows that 'Significant' financial distress
rose across every sector and region of the UK over the past year,
with the Professional and Financial Services sectors being worst
affected, increasing 42% to 26,113 and 34% to 11,079 struggling
businesses respectively. Meanwhile the UK's Support Services,
Construction and General Retail sectors had the highest volume of
businesses in distress over the period, with 101,614, 57,338 and
35,895 companies respectively showing signs of 'Significant'
financial distress.
Geographically, the worst performing region of the UK by volume
was London, where 107,896 companies ended the period in a state of
'Significant' financial distress, an increase of 6% year on year;
representing nearly a quarter of all UK businesses in distress.
Julie Palmer, Partner at Begbies Traynor, said:
"The number of firms experiencing 'Significant' financial
distress has reached unprecedented levels over the past 12 months,
as businesses in search of growth have overstretched themselves,
taking too many risks after being lulled into a false sense of
security by the continued low interest rate environment. Following
a spate of downbeat economic updates, showing everything from
rising inflation and increasing corporate insolvencies to slumping
retail sales and the further decline of the UK's vital construction
sector, our data shows that no segment of the economy has ended the
period unscathed.
"With consumers continuing to borrow using credit cards,
personal loans and car finance at a rate almost five times faster
than their growth in earnings, my biggest concern is on the UK's
ever-expanding consumer credit bubble, which could burst at any
minute, knocking the consumer industries and financial sector for
six. While the prospect of an interest rate increase will of course
go some way to addressing this, the knock-on effect for many
struggling businesses with high levels of debt could be
severe."
Ric Traynor, Executive Chairman of Begbies Traynor,
commented:
"Despite the IMF slashing the UK's economic growth outlook on
account of the weak pound and spiking inflation, UK GDP has
continued to increase ahead of expectations over the past three
months. With this representing the 19(th) consecutive quarter of
GDP growth, the prospect of an interest rate hike this week seems
all the more likely, which will be worrying news for many firms who
have been relying on low rates to keep their heads above water.
"Regardless of whether interest rates rise or fall on Thursday,
there is also a distinct trend emerging among personal services
companies, who seem to be contributing more than their fair share
of distress across multiple sectors of the economy.
"Following HMRC's crackdown on these businesses, many personal
service companies are finding trading conditions particularly tough
under the new regime. As a result, it is likely that we will see a
trend of increasing insolvencies among this group, putting added
pressure and costs on the larger companies and sectors that they
serve."
- Ends -
For further information, contact:
MHP Communications
Katie Hunt / Giles Robinson / Calum MacDougall / Alice Osborn /
Peter Lambie
Tel: 0203 128 8570
Email: Begbiescorporate@mhpc.com
About Red Flag Alert
Red Flag Alert has been measuring and reporting corporate
financial distress since 2004, and over that time has become an
industry benchmark of the underlying health of companies across
every sector and region of the UK.
Through its unique algorithm, the Red Flag Alert 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. Please
note that the Red Flag Alert algorithm was refreshed in Q3 2017 to
enhance the risk factors analysed in the data. The reported results
have been backdated to ensure 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
About 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
through two complementary operating divisions.
Business recovery and financial advisory services
Begbies Traynor is the UK's leading independent business
recovery practice, handling the largest number of corporate
appointments, principally serving the mid-market and smaller
companies.
BTG Financial Consulting provides transactional support,
valuations and advisory services.
We provide these services to businesses, professional advisors,
other stakeholders, investors and financial institutions, working
with all the major UK clearing banks.
Property services
Eddisons is a national firm of chartered surveyors, delivering
advisory and transactional services to owners and occupiers of
commercial property, investors and financial institutions. The
division includes Pugh & Co, the largest regional firm of
commercial property auctioneers by number of lots.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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