Latest Red Flag Alert Report for Q2 13

RNS Number : 2698J

Begbies Traynor Group PLC

15 July 2013

 



UK recovery accelerates with 39% decrease in 'Critical' distress

Sting in the tail - Chronically under-funded SME's at greatest risk of failure during recovery phase

Latest Red Flag Alert Report for Q2 2013

According to the latest Begbies Traynor Red Flag Alert research for Q2 2013, which monitors the financial health of "Corporate UK", levels of 'Critical' financial distress among UK businesses have fallen 39% compared to Q2 2012; the second highest year on year decrease since the beginning of 2011.

Across all sectors, UK businesses experiencing 'Critical' financial problems reduced from 4,947 in Q2 2012 to 3,001 in Q2 2013, indicating a significant turnaround in the health of the UK economy. On a quarterly basis, the improvement continued with levels of 'Critical' distress falling 9% from 3,283 in Q1 2013.

The number of UK businesses experiencing 'Significant' levels of financial distress remains high but is improving, albeit at a slower rate, reducing 18% year on year from 216,396 cases in Q2 2012 to 176,677 in Q2 2013, and on a quarterly basis falling 7% from 190,787 in Q1 2013.

Julie Palmer, Partner at Begbies Traynor, commented: "With critical distress levels falling at a record pace, this quarter's improvement appears to be the first real sign that the UK economy has turned a corner towards a sustained recovery. However we have real fears that many SMEs will have serious financial difficulties at the time they least expect - during a recovery. Our experience has shown time and time again that many SMEs run out of cash during the recovery phase, as there is a real temptation to overtrade.

"Many of these companies at risk have been labelled as "Zombies" in the past but, with the majority having survived the worst of the recession, they are now chronically under-funded; benefitting from low interest rates and improving confidence but in desperate need of finance and, crucially, guidance to help them take advantage of the dawning economic recovery in an unfamiliar post-crisis market.

"To begin the process of guiding these businesses back to health, Begbies Traynor is currently developing a five-point corporate health manifesto, which we hope will encourage further debate on this topic and drive struggling businesses to seek out the support they need."

Important sectors to the UK economy driving recovery

Leading the recovery with significant reductions in 'Critical' financial distress during the period are the Construction, Professional Services and Financial Services sectors, which decreased by 48%, 59% and 30% respectively year on year.

The UK's manufacturing and industrial sectors also experienced considerable improvements in critical distress for the period, thanks to improving domestic and export demand in the quarter. Food and beverage manufacturing saw a 46% reduction in 'Critical' distress year-on-year, while industrial transport and logistics reduced 43% , automotive by 35% and the print and packaging sector, which improved by 35%.

Julie Palmer commented: "The UK services sector continues to prosper, growing in June 2013 to its highest level since March 2011 as incoming new business rose at its highest rate for six years and companies took on more staff than any time since late 2007¹. Meanwhile the financial services industry has benefited from improving market confidence as a result of increased business volumes now that RDR has bedded in, while house builders in particular are going from strength to strength thanks to an improved mortgage environment as well as popular government initiatives such as Help to Buy.

"However this improvement is by no means a uniform picture, with the legal sector under particular pressure following a raft of high profile insolvencies within the industry. Recently the Solicitors Regulation Authority reported that 160 legal practices are under intensive supervision, including 30 of the UK's top 200 legal practices. Meanwhile, as a result of the implications of the new Alternative Business Structures and further reductions in legal spend budgets we expect to see further consolidation as high street, middle tier and some large regional practices look increasingly vulnerable."

Consumer-facing sectors still struggling

The sectors most dependent on consumers' disposable income including hotels, bars & restaurants and general retail were the industries that saw some of the largest quarter on quarter increases in 'Critical' distress, rising 39%, 27% and 7% respectively.

Julie Palmer commented: "The consumer-facing industries continue to struggle as shoppers maintain tight control over their purse strings at a time when disposable income has remained under pressure. Unseasonable spring weather has clearly had an impact on the hotels industry during Q2, with holiday goers avoiding early bookings given the uncertain weather conditions. In addition, aggressive expansion plans from major and budget operators, such as Premier Inn, appear to be squeezing the mid-sized chains and independent hotels, as the industry moves closer towards the budget airline model of advance booking discounts and competitive pricing.

"Most surprising of all is the poor performance of the bars and restaurants sector in Q2 which has seen a marked downturn following a much stronger first three months of this year, when it recorded the largest decrease in financial distress of any industry surveyed. However, as flagged in our last update in April, businesses in this sector were 2.5 times more likely to have adverse creditor actions against them than the average for companies across all sectors, which may go some way to explaining the fragility of this group."

London recovery peaking, while other regions finally catch up

Comparing financial problems by region on a yearly basis, all regions across the UK experienced an improvement in 'Critical' distress, with Scotland and the North East seeing the largest reduction in distress levels, falling 71% and 69% respectively. When comparing Q2 2013 with Q1 2013, most regions continued the momentum with the North East, Yorkshire & Humberside and the East of England seeing the greatest improvement, with 21%, 18% and 14% reductions in 'Critical' distress respectively.

However, of the regions that experienced a positive shift during Q2 2013, London surprisingly saw the smallest improvement with just a 1% reduction in 'Critical' levels compared to the first quarter, suggesting that the other regions of the UK are finally catching up with the Capital, which has been consistently bucking the trend since the financial crisis began. On a quarterly basis, only Northern Ireland experienced a rise in 'Critical' distress, increasing by 4% during Q2 2013.

Julie Palmer added: "The latest regional comparisons indicate that while the vibrant London economy continues to grow, fuelled by its burgeoning residential property market, the other UK regions, particularly the North of England, seem to have finally turned a corner and are now helping to drive the recovery."

Ric Traynor, Executive Chairman of Begbies Traynor Group, concluded: "This quarter the Red Flag statistics indicate that the UK economy has seen one of the largest improvements in corporate health in the last two years, aided by improving conditions and growing confidence across the UK's core markets. 

"However a new breed of chronically under-funded businesses may hold back the economy's growth unless proper guidance is provided to this group of financial crisis survivors, many of whom require innovative support to restructure in order to avoid insolvency in the future and ensure they prosper as the UK economic recovery gains pace. Key to their survival will be improving the funding gap for SMEs and providing greater training for business leaders so they are better able to forecast their businesses' future, especially in the SME community, while ensuring that tax and regulatory obstacles do not block their path to recovery."

- Ends -

For further information contact:

MHP Communications

Katie Hunt / Jade Neal / Giles Robinson / Ben Griffiths

Tel:        [phone] / 8215 / 8788 / 8106

Email:   [e-mail]

Notes to editors:

¹ Markit/CIPS UK Services PMI - 3 July 2013

Critical problems by Sector:

Sector	Q2 2012	Q2 2013	Percent change	Q1 2013	Q2 2013	Percent change
Automotive	127	83	-35%	91	83	-9%
Bars & Restaurants	223	172	-23%	135	172	27%
Construction	988	516	-48%	630	516	-18%
Financial Services	86	60	-30%	84	60	-29%
Food & Bev Mfr Beverage Mfrg	26	14	-46%	22	14	-36%
Food Retailing	64	44	-31%	43	44	2%
General Retail	244	179	-27%	168	179	7%
Hotels	38	43	13%	31	43	39%
Ind Transport & Logistics	115	65	-43%	67	65	-3%
Leisure	37	23	-38%	38	23	-39%
Media	87	59	-32%	67	59	-12%
Other Mfrg	246	222	-10%	208	222	7%
Others	305	127	-58%	122	127	4%
Printing & Packaging	34	22	-35%	24	22	-8%
Professional Services	158	64	-59%	66	64	-3%
Real Estate	326	229	-30%	227	229	1%
Sports & Recreation	33	24	-27%	34	24	-29%
Support Services	264	153	-42%	169	153	-9%
Telecoms & IT	124	102	-18%	110	102	-7%
Travel & Tourism	60	32	-47%	44	32	-27%
Uncoded	1,206	640	-47%	785	640	-18%
Utilities	3	8	167%	4	8	100%
Wholesaling	153	120	-22%	114	120	5%
All Sectors	4,947	3,001	-39%	3,283	3,001	-9%

Critical problems by Region:

Region	Q2 2012	Q2 2013	Percent change	Q1 2013	Q2 2013	Percent change
East of England	356	256	-28%	296	256	-14%
London	691	506	-27%	511	506	-1%
Midlands	661	422	-36%	459	422	-8%
North East	268	84	-69%	107	84	-21%
North West	583	359	-38%	373	359	-4%
Nrthn Ireland	119	50	-58%	48	50	4%
Scotland	410	119	-71%	127	119	-6%
South East	1,010	670	-34%	740	670	-9%
South West	331	193	-42%	216	193	-11%
Uncoded	0	23	-	34	23	-32%
Wales	152	116	-24%	124	116	-6%
Yorkshire & Humberside	366	203	-45%	248	203	-18%
All Regions	4,947	3,001	-39%	3,283	3,001	-9%

Significant problems by Sector:

Sector	Q2 2012	Q2 2013	Percent change	Q1 2013	Q2 2013	Percent change
Automotive	5,909	6,197	5%	6,389	6,197	-3%
Bars & Restaurants	10,451	11,125	6%	11,470	11,125	-3%
Construction	16,468	11,451	-30%	12,386	11,451	-8%
Financial Services	4,818	3,677	-24%	3,885	3,677	-5%
Food & Bev Mfr Beverage Mfrg	763	628	-18%	654	628	-4%
Food Retailing	2,202	2,428	10%	2,478	2,428	-2%
General Retail	10,624	10,872	2%	11,359	10,872	-4%
Hotels	2,316	2,654	15%	2,619	2,654	1%
Ind Transport & Logistics	2,576	1,953	-24%	2,110	1,953	-7%
Leisure	4,995	4,842	-3%	5,185	4,842	-7%
Media	6,941	6,181	-11%	6,712	6,181	-8%
Other Mfrg	6,550	5,300	-19%	5,663	5,300	-6%
Others	20,962	17,931	-14%	19,112	17,931	-6%
Printing & Packaging	873	754	-14%	791	754	-5%
Professional Services	13,562	12,260	-10%	13,627	12,260	-10%
Real Estate	16,936	14,279	-16%	15,394	14,279	-7%
Sports & Recreation	3,514	3,606	3%	3,726	3,606	-3%
Support Services	16,728	14,091	-16%	14,938	14,091	-6%
Telecoms & IT	10,784	9,297	-14%	10,430	9,297	-11%
Travel & Tourism	3,274	2,676	-18%	2,923	2,676	-8%
Uncoded	51,741	31,718	-39%	35,997	31,718	-12%
Utilities	112	95	-15%	103	95	-8%
Wholesaling	3,297	2,662	-19%	2,836	2,662	-6%
All Sectors	216,396	176,677	-18%	190,787	176,677	-7%

About Begbies Traynor Group

Begbies Traynor Group plc is a specialist professional services consultancy providing independent professional advice and solutions to businesses, financial institutions, the accountancy and legal professions and individuals in the areas of recovery, corporate finance, investigations and risk management.  It is listed on AIM (Ticker: BEG).  Further information can be found at: www.begbies-traynorgroup.com.

About Red Flag Alert

Red Flag Alert measures corporate distress signals through a comprehensive and complex methodology, drawing on factual legal and financial data from a wide range of relevant sources for companies that have been trading for over a year.

The release refers to the numbers of companies experiencing 'Critical' problems which are those with CCJs totalling over £5,000 within a three month period or winding-up petitions against them or which have entered Corporate Voluntary Arrangements.

The release also 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

 

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