TIDMBEG
Begbies Traynor Group PLC
31 October 2023
25% Rise in Critical Financial Distress Pushes Almost 40,000 UK
Companies Towards Insolvency
-- There has been a marked increase in the number of businesses
in 'critical' financial distress since Q2, up nearly 25% to 37,722
in Q3 2023.
-- Almost 480,000 businesses across the UK in 'significant'
financial distress, 8.7% higher than Q2 and 4.7% higher than the
same period in 2022 (Q3 2022: 456,949).
-- 18 of the 22 sectors covered by Red Flag saw a double digit
increase in companies in critical financial distress compared to
the prior quarter.
-- Serious concerns regarding the outlook for the Construction
and Real Estate & Property Services sectors as critical
financial distress jumps 46% and 38% respectively on Q2.
-- Critical financial distress also rose considerably in the
retail sector, with Food & Drug Retailers up 33% and General
Retailers up 14%, compared to the previous quarter.
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 nearly 40,000
companies are revealed to be in a critical financial situation as
the pressure of higher interest rates, resilient inflation and
weaker consumer confidence take their toll. These pressures are now
clearly being seen beyond consumer facing sectors and are becoming
widespread, particularly within the construction and property
sectors.
With many UK companies accustomed to years of near zero interest
rates and access to Government-backed Covid support loans, the new
world of elevated interest rates will continue to push many
businesses the very edge of failure.
Evidence of the stress in the UK economy can be seen in the
rapid quarter-on-quarter growth in the number of companies in
critical financial distress, up 24.9% to 37,722. The sectors
driving this increase were the Construction, Real Estate &
Property Services and Support Services, up 46%, 38% and 28%
respectively.
The Construction and Real Estate companies now account for
almost 30% of all companies in critical financial distress as the
slowdown in the residential housing market continues to bite. Rises
in the retail sector, with Food & Drug Retailers up 33% and
General Retailers up 14% quarter on quarter also contributed to the
overall uplift in critical financial distress.
Additionally, there has also been a marked acceleration in the
number of companies experiencing significant financial distress
with 478,176 businesses now affected, up 8.7% on the prior quarter
(Q2 2023: 439,815). The Construction and Support Services sectors
accounted for nearly 50% of the quarter-on-quarter rise, as they
were up by 17.4% or 10,741 companies, and 11.1% or 7,584 companies,
respectively.
Julie Palmer, Partner at Begbies Traynor, said: "Tens of
thousands of British companies are now in financial dire straits
now that the era of cheap money is firmly behind us.
"Businesses that had loaded up on debt at rock-bottom rates, and
were only able to cling on during the pandemic thanks to Government
support, must now deal with a financial reality check as higher
interest rates hit working capital for the foreseeable future.
"Taken together with stubbornly high inflation and weak consumer
confidence, many of these businesses will inevitably head towards
failure.
"The construction industry, which has long been a bellwether for
the health of the economy, looks particularly vulnerable with over
70,000 firms now in significant financial distress and circa 6,000
in much more serious critical financial distress - often a
precursor to formal insolvency.
"These businesses must now struggle through a period of
inflation-eroded margins, weak demand and a looming recession. It
is likely to be an insurmountable task for many.
"This latest data highlights how the debt storm, which has been
brewing for years, but had been held off by several measures to
provide breathing space for companies, may very well break.
Something that will send shockwaves through the whole economy."
Ric Traynor, executive chairman of Begbies Traynor, commented:
"The current combination of macro-economic risks is piling on the
pressure and really starting to take its toll on UK businesses, as
evidenced by the latest research data from Red Flag Alert.
"I am hopeful that stabilising inflation and interest rates will
start to slow the rising levels of distress in the economy in due
course, but history dictates that this will take some time and
insolvencies often peak long after a recovery has started.
Unfortunately for many businesses, time is not on their side.
"The ongoing geo-political uncertainty, which is particularly
affecting commodity and energy prices, coupled with high interest
rates, weak consumer demand, sticky levels of inflation and an
anticipated recession over the coming year, may simply prove too
much for many of these distressed businesses.
"So, given the challenges the economy still faces, the outlook
remains pretty bleak, and I expect many more 'zombie' companies to
continue to fail for some time to come as the impact of this
economic backdrop makes them increasingly unviable."
Top 10 Sector Ranking - Critical Top 10 Sector Ranking - Significant
Financial Distress (Number of Financial Distress (Number of
Companies in Critical Financial Companies in Significant Financial
Distress) Distress)
1. Construction (5,919) 1. Support Services (75,589)
2. Support Services (5,741) 2. Construction (72, 257)
3. Real Estate & Property Services 3. Real Estate & Property Services
(4,994) (51,240)
4. Professional Services (3,032) 4. Professional Services (44,491)
5. General Retailers (2,759) 5. Telecommunications & Information
6. Telecommunications & Information Technology (32,234
Technology (2,264) 6. General Retailers (30,177)
7. Health & Education (1,924) 7. Health & Education (30,176)
8. Media (1,481) 8. Media (18,921)
9. Food & Drug Retailers (1,222) 9. Financial Services (15,123)
10. Bars & Restaurants (1,073) 10. Other Manufacturing (13,535)
Significant distress by region Critical distress by region
1. London (137,515) 1. London (12,146)
2. South East (83,598) 2. South East (6,233)
3. Midlands (58,053) 3. Midlands (4,242)
4. North West (49,856) 4. North West (4,007
5. South West (34,332) 5. Yorkshire (2,495)
6. Yorkshire (32,837) 6. South West (2,405)
7. East of England (30,462) 7. East of England (2,261)
8. Scotland (22,839) 8. Scotland (1,783)
9. Wales (12,613) 9. Wales (953)
10. North East8480 10. North East (658)
11. Northern Ireland (7,526) 11. Northern Ireland (538)
12. Misc (65) 12. Misc (1)
--S--
For further information, contact:
MHP Communications:
Katie Hunt 07595 461 231
Charles Hirst 07827 662 831
Matthew Taylor BegbiesCorporate@mhpgroup.com
Notes to Editors
About Red Flag Alert
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 company accounts and 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 H1 2023 to enhance the risk factors
analysed in the data. The reported results have been backdated to
ensure the consistency of comparative data.
Algorithms which drive Red Flag Alert have been improved and
updated for the latest report, with companies now measured against
a new scorecard of indicators to give greater insight and accuracy
into the health of businesses. Two years of work by data scientists
analysing eight years of data, taking into consideration pre,
during and post-pandemic insights to find signals and patterns
indicating businesses in distress, combined with AI tools, means
that Red Flag Alert aims soon to be able to predict how many
companies in trouble will go on to fail.
The release refers to the number of companies experiencing
"Significant" or "Critical" problems, which are those that 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.
Red Flag Alert is commercially available to all businesses, on
an annual subscription basis, to help them better understand risk
and exposure and help subscribers to plan 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.
About Begbies Traynor Group plc
Begbies Traynor Group plc is a leading professional services
consultancy, providing services from a comprehensive network of UK
and off-shore locations. Our professional team include licensed
insolvency practitioners, accountants, chartered surveyors, bankers
and lawyers. We provide the following services to our client base
of corporates, financial institutions, the investment community and
the professional community:
-- Insolvency
o Corporate and personal insolvency
-- Financial advisory
o Business and financial restructuring; debt advisory; forensic
accounting and investigations
-- Transactional support
o Corporate finance; business sales agency; property agency;
auctions
-- Funding
o Commercial finance broking; residential mortgage broking
-- Valuations
o Commercial property, business and asset valuations
-- Projects and development support
o Building consultancy; transport planning
-- Asset management and insurance
o Commercial property management; insurance broking; vacant
property risk management
Further information can be accessed via the group's website at
www.ir.begbies-traynorgroup.com
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END
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