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."

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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 

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