RCS - Begbies Traynor - Latest Red Flag Alert Report for Q3 2022

Begbies TraynorAnnouncement

19/10/2022 07:00

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RNS Number : 3190D  Begbies Traynor Group PLC  19 October 2022

07.00, 19 October 2022

 

Critical corporate financial distress levels jump as businesses deal with the
deteriorating economic environment

·    There has been a considerable increase in the number of businesses in
critical financial distress over the last year, with a 25% increase in Q3 22
compared to Q3 21.

·    Bars & Restaurants and General Retailers continue to be major
drivers of this increase in critical financial distress, up 48% and 72%
respectively, increases in Leisure and Cultural Activities, up 36%, and Media,
up 48%, when comparing Q3 22 to Q3 21.

·    There are nearly 610,000 companies in significant financial distress,
representing an 8% year on year increase (Q3 22 v Q3 21) and a 4% quarter on
quarter increase.

·    Significant financial distress has increased quarter on quarter (Q2 22
v Q3 22) across all 22 sectors covered by this Red Flag research.

·    17,637 county court judgements (CCJs) were served against businesses
during Q3 22 - bringing the total for the first nine months of 2022 to 63,831.

·    There have now been more CCJs in the first nine months of 2022 than in
the entirety of 2021 or 2020, and the second highest level for the first nine
months of a year since 2010.

 

The latest Begbies Traynor Red Flag alert report, which has provided a
snapshot of British corporate health for the past 15 years, paints a worrying
picture for UK businesses as an increasing number are now falling victim to
the exceptional economic pressures that continue to build in the economy.

The latest data reveals that the number of companies rated as being in
"critical financial distress" continued to rise rapidly in the third quarter
of 2022, jumping by 25% compared with the same period in 2021 to 2,090, and up
7% versus Q2 2022.

With the official rate of inflation in excess of 9%, and inflation in the
'real economy' likely exceeding this, businesses now face the very real
prospect of interest rates climbing above 5%, a move that could force
distressed businesses to enter insolvency as debt built up over the last
decade and rapidly added to during the pandemic becomes unserviceable.

Many of these 'zombie' businesses, which benefitted from Government-backed
Covid support loans, now face a series of risks ranging from soaring interest
rates, to rising costs and declining demand, meaning that in many cases the
growing challenges may prove too much.

The most recent company CCJ data reveals further evidence of the level
distress in the economy today. Often an early indicator of financial distress,
the data shows the number of CCJs for the first nine months of 2022 was 63,831
- more than the entirety of either 2021 or 2020 and nearly the second highest
total since 2010.

Similarly, Winding Up Petitions, a much more serious action lodged by
creditors, were 237% higher than the same period 2021, showing that companies
are utilising aggressive legal enforcement measures to recoup debts.

 

Sectors with the highest number of critically distressed businesses;

·    Construction

·    Support Services

·    General Retailers

·    Real Estate & Property Services

·    Bars & Restaurants

·    Automotive

·    Other Manufacturing

·    Industrial Transportation & Logistics

·    Food & Drug Retailers

·    Telecommunications & Information Technology

·    Financial Services

 

(Ranked by number of companies in critical financial distress)

 

Julie Palmer, partner at Begbies Traynor, said the growing number of companies
in a critical financial distress was of particular concern:

"We are now in an environment that we have not seen for many years, with a
dangerous mix of rapidly rising inflation, escalating interest rates and
crumbling consumer confidence.

"The economy, which had already been weakened by two years of pandemic
disruption, now faces the very real possibility of a recession at a time when
businesses were in desperate need of a sustained period of stability so they
could get back on their feet.

"What we have instead is a situation where input costs are soaring and
businesses that borrowed to survive for years and are stuck with levels debt
that they may be unable repay - especially with interest rates expected to
rise to circa 6% in 2023.

"The economic turmoil is also having a stark effect on consumer confidence,
and I remain particularly concerned about sectors most exposed to
discretionary consumer spending, namely Bars & Restaurants, Leisure, and
General Retailers. These businesses were some of the worst affected by
pandemic chaos and now their customers are reining in discretionary spending,
something we can clearly see in this Red Flag data."

She added that her own conversations with the directors of distressed business
are showing widespread evidence of fatigue across SMEs.

Julie Palmer added: "After several years of volatility, the directors of
businesses up and down the country are now facing very difficult decisions.
They must decide whether to soldier on or give in, as they realise their
businesses may not be viable if interest rates continue to rise as many
economists expect.

"For the time being, many will continue to resist but interest rates will
continue to rise, energy costs will remain stubbornly high, despite the
Government's intervention, and consumers are reining in spending, so the
future is far from bright when we look into 2023.

"I fear that many directors who fought through Covid will soon conclude that
getting through 2023 and 2024 is a bridge too far after the troublesome period
they have just battled through."

Ric Traynor, executive chairman of Begbies Traynor, commented:

"This latest data clearly shows that many UK businesses are struggling as the
macro-economic backdrop continues to deteriorate.

"Unfortunately, things are only likely to get worse, especially while we have
the conflict in Ukraine, an ever-strengthening dollar, and a lack of complete
clarity on the UK's fiscal plan. Inflation remains at levels not seen in 40
years and companies that have been burdened with high levels of debt are now
seeing interest rates rise rapidly. For many, this will simply be too much.

"With consumer confidence where it is, it feels like we are heading towards a
bleak winter and 2023 and, after two years of extensive financial support for
businesses, the Government has little left in reserve to help businesses to
ride out this economic storm."

-- ENDS --

 

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
£5k) 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
£5k) 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 £5k) 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 (http://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
(https://urldefense.proofpoint.com/v2/url?u=http-3A__www.begbies-2Dtraynorgroup.com_investor-2Drelations&d=DwQGaQ&c=Ftw_YSVcGmqQBvrGwAZugGylNRkk-uER0-5bY94tjsc&r=4c8-e7ZulPluCjuukCUl3Blcpa7AxNK9t_fq5q12Rio&m=gniKH13HovPYCUqh05hwVKc1DJGxkZ3dwvoxVs_lHHc&s=awSgXTvfyTjgcykSM9Qoz7ojnpEf1ZCJd21_xLbjAkI&e=)

 

 

 

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