The latest Red Flag Report from business advisory and insolvency firm Begbies Traynor (BEG:AIM) not only shows a sizeable increase in UK companies in significant financial distress, it suggests there is a wave of insolvencies set to break across the corporate sector later this year.
Begbies’ second quarter alert shows a 9% year-on-year rise in companies in 'significant' distress, defined as firms with minor county court judgements (CCJs) against them or which have scored poorly on its proprietary credit risk scoring system, to 527,000.
However, the research warns that the increase ‘could have been much higher, were it not for reduced court activity due to the coronavirus pandemic which has substantially reduced the number of CCJs and winding up petitions being taken against indebted companies.’
The number of CCJs filed between March and May this year was just 10,766, a drop of 40% on last year, while the situation is ‘even more serious’ for winding-up petitions which are down 73% on last year.
Begbies says ‘it is likely that the true impact of the coronavirus pandemic will only become apparent during the third and fourth quarters of 2020 as government support initiatives are unwound and courts fully reopen so that enforcement action can be taken.’
Julie Palmer, partner at the firm, warns of ‘a dam of company financial distress waiting to break upon the UK economy.
‘With government initiatives to support businesses now winding down, we will start to see the true impact of coronavirus on the UK during the autumn. This crisis will force many zombie companies out of business. While these were clinging on to survival prior to the pandemic, many will now have become simply unviable due to high levels of debts and poor sales.’
The only ray of light for corporate Britain is that businesses with the capital and the management ability to adapt to the crisis should flourish at the expense of weaker rivals as they increase their market share and most likely their margins.
As in past quarters, the most seriously affected sectors are construction and real estate, while in the automotive sector the number of companies in the supply chain experiencing financial distress is also rising sharply.
Unsurprisingly the retail sector has been hard hit by the virus, but even online retail businesses haven’t escaped the grip of the pandemic with more than 3,500 firms in financial distress.
Even with the unprecedented support of the Treasury, which has given many firms a stay of execution, ‘businesses will have to deal with a toxic mix of reduced sales and increased levels of debt, plus the complications of dealing with staffing levels that cannot be supported by the level of business going forward’ said Begbies’ chairman Ric Traynor.
‘Change has been coming for some time before coronavirus, and after one and a half years of consistently increasing levels of distress, this pandemic has accelerated the rate of change.’
