Latest Red Flag Alert Report for Q2 2021

RNS Number : 6688G

Begbies Traynor Group PLC

28 July 2021

 

Embargoed until 28.07.2021

650,000 UK Businesses Facing Significant Financial Distress

· 10% decrease from Q1 2021 to Q2 2021

· 24% year-on-year increase in 'significant financial distress¹' (124,525 businesses) since Q2 2020

· 90% year on year increase in CCJs in Q2 2021 (7,617 Q2 2020, 14,460 Q2 2021)

The latest Red Flag Alert research for Q2 2021 has recorded 650,000 businesses in 'significant financial distress¹' - the second highest distress level ever recorded by this research. However, this number has fallen 10% since the highest recorded number of significantly distressed businesses in Q1 2021 (723,000) by the Red Flag Alert, as the economy has reopened and allowed some companies to pay down some of their more critical debt in order to avoid court action.

This newly published research from Begbies Traynor also found that despite the Q2 improvement in the financial performance of businesses, the numbers of significantly distressed companies is still 24% higher than the same time last year (526,967 - Q2 2020, 651,492- Q2 2021) with 12 month increases in the real estate and property services sector (35% from 58,844 - Q2 2020, 79,695- Q2 2021), the financial services sector (27% from 13,307- Q2 2020, 16,903 - Q2 2021), the travel and tourism sector (26% from 3,897- Q2 2020,4,908- Q2 2021) and the construction sector (26% from 67,917- Q2 2020, 85,376- Q2 2021).

Court Action

As reported in the first quarter of the year, court action remains depressed due to a moratorium on proceedings during the pandemic. However, the latest official figures show that court activity is picking up as creditors, especially landlords, become more aggressive in chasing debts.

Official data shows there were 7,617 CCJs lodged against companies during April, May and June in 2020, with this number increasing to 14,460 during the same period in 2021, a 90% uplift.

Despite this increase, the number of more serious winding up petitions has remained depressed in 2021 with just two recorded in Q2 2021 as the moratorium took effect. This number is significantly down compared to April, May and June 2020; 172 winding up petitions were lodged which is still significantly lower than pre pandemic levels of 714 in Q1 2020.

Julie Palmer, Partner at Begbies Traynor, said:

"Although the reopening of the retail and hospitality sector has given the economy a boost in Q2, the number of zombie businesses remains considerable, with many in a fragile state. Covid has dramatically accelerated the UK's zombie business population, with many businesses taking on unsustainable government backed debts during the pandemic in order to survive. With constant changes to the UK roadmap out of lockdown, many remain in a precarious position, with any future lockdowns likely to impact insolvency rates.

"Whilst "Freedom Day" on 19^th July has given many businesses a sense or normality, history suggests that unmanageable levels of debts and subsequent overtrading will eventually take their toll on these businesses.

"Yet, the last quarter has demonstrated that it is not all doom and gloom for businesses. Consumers want to spend, businesses want to expand and adaptation provides an opportunity for fresh shoots in the economy."

Sectors

The leisure and cultural activities sector has bounced back as lockdown eased in Q2, with a 10% decrease in the number of businesses in significant financial distress (18,710-Q1 2021, 16,824- Q2 2021). Year on year, however, there has been an increase of 21%, demonstrating the continued impact of the pandemic upon this sector.

Despite the booming residential property market, the whole real estate and property sector - a key indicator of the economy's performance - has continued to struggle with only a 6% quarterly decrease in the number of businesses in significant financial distress (85,165- Q1 2021, 79,695- Q2 2021).

UK Regions

All UK regions recorded a quarterly decline in the number of businesses in significant financial distress, yet annually, each region has recorded at least a 16% increase. As a possible consequence of uncertainty surrounding Brexit negotiations, Northern Ireland has recorded one of the greatest annual increases, of 28% (7,731- Q2 2020, 9,860- Q2 2021).

London's reliance on the leisure & hospitality and financial services sectors has made it the most vulnerable region during the past year, as a result of the short-term effects of Covid. Businesses in London experienced a 28% year on year increase in significant financial distress, and the lowest quarter-on-quarter decrease of all regions, at 9% (135,760- Q2 2020,190,829- Q1 2021,174,107- Q2 2021).

Ric Traynor, Executive Chairman of Begbies Traynor Group plc, commented:

"The latest 10% fall in financial distress is welcome news with the staged reopening of the economy boosting cashflow and allowing companies to pay down some of their most pressing debt. However, one swallow does not make a summer and UK businesses are likely to face challenges as pent up demand is expected to tail off later in the year and during 2022.

"Unfortunately, businesses still have a very long way to go before they can return to a sound financial footing, with many facing a legacy problem of managing significant debt for many years to come.

"Hidden risks abound for UK businesses and all represent a real threat to corporate survival in the short term. The first is overtrading - many businesses are experiencing high demand and failure to manage their funding lines presents a real threat to their viability as many will simply run out of cash.

"Secondly key component availability is likely to be a key pinch point for manufacturers - this is not just semiconductors but across a whole range of raw materials which will severely restrict the ability of companies to get products out of the factory gate.

"Thirdly, staff absence due to both the current growth in infection rates and the UK's self isolation "pingdemic" and finally the limited availability of foreign/migrant labour due to Covid and Brexit, particularly affecting the hospitality sector.

"These risks combined with the gradual withdrawl of government support measures and protection are likely to see an acceleration in insolvency rates late Q3 and into 2022.

"However, despite the pandemic, there are many businesses that have adapted or were well suited to these conditions and they are starting to grow and recruit now that the economic picture is becoming rosier. It is these businesses demonstrating financial resilience and taking up their opportunities to use the financial resources available in the market that can make their mark on the UK."

- ENDS -

1 'Significant' distress is those 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.

2  'Critical' distress are those businesses with minor CCJs (of more than £5k) filed against them

3 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.

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Notes to Editors:

About Red Flag Alert

Red Flag Alert has been measuring and reporting corporate financial distress since 2004, and over that time has become an industry benchmark of the underlying health of companies across every sector and region of the UK. 

Through its unique algorithm, the Red Flag Alert 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. Please note that the Red Flag Alert 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

 

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