Q3 2010 Red Flag

RNS Number : 2869U

Begbies Traynor Group PLC

13 October 2010

 



For immediate release                                                                                                                                        13 October 2010

UK PLC struggling with £57.5bn liabilities as government prepares to announce Spending Review

Key Headlines:

·     123,361 UK companies experiencing significant or critical distress

·     Those with critical problems owe more than £57.5 billion to creditors, suppliers and service providers

·     More than 50,000 companies at risk from government spending cuts to be announced next week

·     Previous improvements in the numbers of companies with severe problems now slowing down across the board

·     HMRC wind-up petitions on the increase as HMRC understandably tries to increase tax revenues from both corporates and individuals

Over 123,000 UK companies are struggling under the weight of nearly £58 billion worth of liabilities, according to the latest quarterly Red Flag Alert, issued today by Begbies Traynor, the UK's leading business recovery specialist.

The report, which monitors the early warning signs of company distress, has found that 123,361 companies experienced 'significant' or 'critical' financial distress in Q3 2010, with those experiencing 'critical' financial problems owing over £57.5 billion to creditors, suppliers and service providers.

Public sector already suffering

This news comes against a challenging backdrop. Earlier this month, house prices registered their biggest ever monthly fall, and next week the government is preparing to announce the results of the Comprehensive Spending Review, in which it is expected to reveal a raft of spending cuts which will hit those businesses most dependent on public spending hard.

According to Red Flag Alert, 50,299 companies are already experiencing financial distress in these sectors which cover construction, IT, recruitment, advertising and business services.  Whilst this represents a slight improvement on the previous quarter, (down 4% compared to 51,711 in Q2 2010), overall the figures show a marked slowdown in the rate of recovery when compared to the 20% improvement in Q2 2010 from 64,805 in Q1 2010.  This sharp reversal of fortunes was particularly pronounced in the advertising sector, down 29% between Q1 and Q2 2010, but now revealing a 27% increase in businesses experiencing financial distress in the sector from 705 in Q2 to 892 in Q3 2010.

Ric Traynor, Executive Chairman of Begbies Traynor Group, said: "It will not be until the Government's Comprehensive Spending Review in a week's time that we will know for certain the allocation of all of the anticipated £83 billion of spending cuts.  However, our Red Flag Alert statistics show that the sectors most likely to be most impacted are already starting to shows definite signs of financial distress.  With confidence in the construction sector falling to an eighteen month low², recruitment activity at its slowest for almost a year³ and a strong increase in distress in the advertising sector, there is a growing risk that even if the wider UK avoids a double dip recession, public-sector dependent industries face higher levels of financial distress."

The slowdown in the rate of recovery has been found across the board in the latest Red Flag Alert statistics. Overall, although the number of companies experiencing distress has fallen by 10% compared to 137,268 in Q3 2009, the rate of recovery is the slowest for five quarters and compares to a 31% decline in distress in Q2 2010 versus Q2 2009.

In addition, this latest quarter has also been marked by a significant increase in the number of HMRC wind-up petitions - up 39% between August and September, showing that the government may understandably be getting tougher on chasing taxes to increase revenues from both corporates and individuals.

Traynor added: "The decline in the numbers of businesses in distress reflects a combination of lenient creditor attitudes and the effects of temporary government support initiatives, including quantitative easing, the time to pay scheme and low interest rates.

"However, the marked slowdown in the rate of recovery points to the renewed challenges facing UK corporates, as reflected by a recent significant weakening in corporate confidence¹, and there is some early evidence that creditors such as HMRC are adopting a harder line in collecting debts. 

"Our Red Flag Alert statistics do not fully account for the substantial number of informal arrangements being made between companies and their creditors behind the scenes.  We urge businesses to formalise those arrangements, which are not currently legally binding, while creditors remain more sympathetic or risk harsher terms or adverse actions in the future."

Further distress expected in the consumer facing industries

The consumer facing sectors of retail, leisure and travel have also seen a slowdown in their rate of recovery.  15,500 companies are experiencing financial distress, representing a 7% improvement from 16,650 in Q2 2010 compared to an 11% improvement in Q2 2010 from 15,436 in Q1 2010.

Traynor added: "Retail, leisure and travel are already seeing a slowing rate of recovery ahead of greater pressure on consumers' disposable incomes from increased VAT rates and public spending cuts.  With recent evidence of house price reductions⁴, falls in consumer credit⁵ and lower savings ratios⁶, we expect a combination of deteriorating consumer confidence and financial resources to result in growing numbers of business failures in those sectors most exposed to discretionary spending. 

"Whilst the retail sector may benefit from a short term boost as consumers purchase bigger ticket items ahead of the VAT rise in January, we expect to see a significant rise in failures in the sector from the first quarter of 2011."

Unwinding of government support measures starting to have an impact

In addition, Red Flag Alert also shows that there was an 11% increase in companies experiencing financial problems in the automotive sector from 3,007 in Q2 2010 to 3,352 in Q3 2010.

Traynor added: "The automotive sector represents the first sector to feel the impact of the unwinding of temporary government support measures, as shown in an 11% increase in financial distress during the period following the withdrawal of the UK carscrappage scheme in March this year."

Summary

"We believe that there will be a prolonged period of growth in business distress, as SMEs feel the full impact of the gradual unwinding of government support measures combined with public sector spending cuts and deteriorating business and consumer confidence.

"The £57.5 billion of liabilities still at risk of default by businesses in distress remains a very real and potentially far-reaching threat to creditors and to a smooth economic recovery. 

"As the government has acknowledged, its key challenge is to strike the fine balance between maintaining confidence in its ability to reduce the UK's deficit, whilst ensuring that cuts to public sector spending and the withdrawal of temporary support measures are sufficiently staggered to maintain the recovery."

Q3 2010 Red Flag Alert Statistics

'Significant' and 'Critical' problems by Sector:

Sector	Q3 2009	Q3 2010	Percentage change	Q2 2010	Q3 2010	Percentage change
Automotive	3,922	3,352	-15%	3,007	3,352	11%
Construction	18,089	15,894	-12%	17,033	15,894	-7%
IT	7,015	6,231	-11%	6,906	6,231	-10%
Engineering	1,868	1,698	-9%	1,799	1,698	-6%
Print & Packaging	1,993	1,757	-12%	1,891	1,757	-7%
Manufacturing	5,857	5,353	-9%	5,477	5,353	-2%
Financial Services	2,823	2,587	-8%	2,604	2,587	-1%
Property Services	13,980	12,097	-13%	12,595	12,097	-4%
Hire/Rental Services	1,002	894	-11%	952	894	-6%
Recruitment	1,381	1,231	-11%	1,281	1,231	-4%
Advertising	908	892	-2%	705	892	27%
Professional Services	7,738	7,035	-9%	7,265	7,035	-3%
Business Services	27,185	25,508	-6%	25,786	25,508	-1%
Retail	9,820	8,751	-11%	8,994	8,751	-3%
Wholesale	5,641	5,001	-11%	5,099	5,001	-2%
Leisure & Travel	8,696	6,685	-23%	6,656	6,685	0%
Transport & Communications	4,598	4,060	-12%	4,369	4,060	-7%
Others	14,752	14,335	-3%	15,084	14,335	-5%
Total	137,268	123,361	-10%	127,503	123,361	-3%

¹ ICAEW Q3 2010 Business Confidence Monitor

² Markit/CIPS UK Construction PMI, September 2010

³ REC Report on Jobs, September 2010

⁴ Halifax House Price Index, September 2010

⁵ Bank of England, Lending to Individuals in August 2010

⁶ Building Societies Association, August Monthly Statistics 2010

For further information, please contact:

MHP Communications

Lucinda Kemeny / Katie Hunt / James White                                                                                           020 3128 8100

                                           [e-mail] / [e-mail] / [e-mail]

About Begbies Traynor 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 survey monitors the numbers of companies experiencing difficulties in two categories: "Significant Problems" and "Critical Problems".  

Companies with "Significant Problems" are those with either a court action and/or poor, very poor insolvent or out of date accounts.

Companies with "Critical Problems" are those with CCJstotalling £5,000 or more and/or Wind-Up Petition related actions.

Red Flag Alert is now 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. 

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 professions and individuals in the areas of corporate finance, recovery, investigation, risk management, commercial finance and specialist tax advice. It is listed on AIM (Ticker: BEG).

 

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