The latest Red Flag Alert research for Q2 2021 has recorded 650,000 businesses in ‘significant financial distress’ – 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).
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 19th 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.”
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).
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, said “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 withdrawal 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.”