TIDMBEG
Begbies Traynor Group PLC
29 October 2020
557,000 UK businesses now in significant distress as numbers
rise
-- 557,000 businesses now in 'significant distress(1) '
following biggest increase in quarterly distress since 2017 (6%
increase of 30,000 from Q2 2020 to Q3 2020)
-- 9% increase in 'significant distress(1) ' (48,000 businesses) since the March lockdown
-- Double-digit increases in 'significant distress' since Q1 for
real estate (11%), food and drug retailers (14%) and bars and
restaurants (10%)
The latest Red Flag Alert research for Q3 2020 has recorded
557,000 businesses in 'significant distress(1) ' after the largest
quarterly leap in financially distressed companies since 2017. This
6% increase (from 527,000 in Q2 2020) in the last three months
comes despite a backlog of court action preventing many CCJs and
winding up petitions being issued.
This newly published research from Begbies Traynor, also finds
that there has been a 9% increase in significantly distressed
companies since the end of the first quarter (509,000 Q1 2020,
557,000 Q3 2020) - two weeks into lockdown.
Since this time there have been double-digit percentage
increases in financial distress in 10 out 22 sectors analysed. This
includes food and drug retailers (14%, 13,018 Q1 2020, 14,806 Q3
2020), construction (11%, 65,456 Q1 2020, 72,402 Q3 2020) and real
estate and property (11%, 56,421 Q1 2020, 62,615 Q3 2020)
sectors.
The rise could have been much higher, were it not for reduced
court activity due to the coronavirus pandemic, which has limited
the number of CCJs and winding up petitions being issued against
indebted companies and the ban on winding up petitions for Covid
related debts.
Data shows there were 26,244 CCJs lodged against companies
during July, August and September in 2019, with only 10,045 lodged
during the same period in 2020, a fall of 62%. The situation is
even more acute with regard to more serious winding up petitions.
During July, August and September 2019, 1,019 were lodged compared
to 101 during the same period in 2020, a fall of 90%.
Julie Palmer, Partner at Begbies Traynor, said:
"It is noteworthy that the number of businesses in significant
distress have grown substantially in the last three months, even
with court capacity significantly reduced due to the pandemic. With
so many businesses limping along there could be a flood of
insolvencies when the courts do get back to anywhere near normal
capacity and attempt to clear the backlog of pending cases. This in
itself, combined with the end of the furlough scheme and other
government support measures, is likely to have a material impact on
the UK business failure rate.
"Unfortunately for the many zombie companies in existence across
the UK, a perfect storm is on the horizon. A combination of a grim
economic backdrop and very poor trading conditions, particularly in
the most vulnerable sectors, such as hospitality will take its toll
and this is expected to feed through to Q1 2021, particularly when
the government ends its high profile corporate life support
measures."
Even though all 22 sectors measured by the Red Flag Alert,
research showed an increase in significant distress since the start
of the year, some sectors have experienced a harder fall than
others in the last quarter, including those which have been
thriving since reopening;
Real Estate & Construction
In the last quarter alone almost 4,500 construction businesses
have fallen into significant distress - an increase of 7% to
72,402. With 9% more commercial builders (2,602 Q2 2020, 2,824 Q3
2020) and 8% more house builders (6,871 Q2 2020, 7,405 Q3 2020) in
significant financial distress many businesses in the sector are
feeling the pain of coronavirus.
Even though there have been encouraging signs for the real
estate sector, it has failed to recover from the industry grinding
to a halt with an additional 3,700 businesses struggling. This
increase of 6% since the first quarter means there are now 62,615
companies in distress, a year-on-year increase of 23% (51,113 Q3
2019, 62,615 Q3 2020) - the largest year-on-year increase across
the 22 sectors.
Hospitality and Retail
The hospitality sector has unsurprisingly been hit hard and that
is now starting to show with a 10% increase in distressed bars and
restaurants since the start of lockdown (18,011 Q1 2020, 19,760 Q3
2020), and a 5% increase in the last quarter alone (18,750 Q2 2020,
19,760 Q3 2020). These numbers are likely to be understated because
of the reduced court activity and other short-term protection
measures which will at some point come to an end and the true
impact will be revealed.
Retail continues to be hit hard as well. While the entire
industry saw a 9% increase in distressed companies since the start
of lockdown (32,495 Q1 2020, 35,448 Q3 2020), there was another
story to be told with regard to online, fashion and high street
retailers. Since the start of lockdown there has been an 11%
increase in online retailers in distress (9,374 Q1 2020, 10,433 Q3
2020), with 8% more fashion retailers in trouble vs the start of
lockdown (3,510 Q1 2020, 3,783 Q3 2020). The accelerated move to
online sales has not helped every business, however, the
significantly larger numbers of high street retailers also
witnessed a large increase of 7% (18,464 Q1 2020, 19,718 Q3
2020).
Automotive
At the end of Q3 2020 almost 17,000 automotive businesses were
in distress - an increase of more than 1,000 since the start of
lockdown (15,311 Q1 2020, 16,878 Q3 2020). Many of these businesses
sit within the automotive supply chain, which has a stronghold in
the Midlands, where 10% more businesses are in distress than at the
start of lockdown (60,482 Q1 2020, 66,545 Q3 2020). Unfortunately,
with the UK potentially heading for a no deal Brexit, the outlook
for this sector looks somewhat bleak.
Ric Traynor, Executive Chairman of Begbies Traynor Group plc,
commented:
"The Government's well publicised support measures have saved
thousands of businesses from certain insolvency in the short term,
but the recently launched reduced version of the furlough scheme
and the end to Government guaranteed loans will serve to give many
businesses a brutal reality check.
"In fact, many of these businesses were debt laden before the
pandemic struck and had little prospect of a viable turnaround.
They have seen their life prolonged by the availability of
Government loans and employee cost subsidies, as evidenced by the
30% + fall in insolvencies over the last six months. Inevitably
their underlying lack of profitability and accumulated debt will
catch up with them once the subsidies end and they face the harsh
realities of the challenging economic environment.
"What is uncertain is whether these same government schemes will
be enough to shield the businesses which were viable pre Covid and
allow them to prosper once again when the "new normal" appears.
"With the UK's service-based economy almost certain to
experience permanent changes brought about by the coronavirus
pandemic a comprehensive government-backed retraining programme for
those employees affected by these changes is needed as many people
will be forced into career changes and require the appropriate
skill sets for the post-pandemic world."
- Ends -
1 'Significant' distress is those 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.
2 'Critical' distress are those businesses with minor CCJs (of
more than GBP5k) filed against them
For further information, contact:
McCann PR & Social
Ian Stanley / Tom Chaplin
Tel: 0121 713 3566 / 07974 266458
Email: Begbies@mccann.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
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.
Notes to editors
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 735 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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END
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