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Begbies Traynor Plc - Latest Red Flag Alert Report for Q1 2021

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Begbies Traynor Plc

Latest Red Flag Alert Report for Q1 2021

Highest quarterly leap recorded by Red Flag Alert as almost 100,000 additional businesses drop into significant financial distress in Q1 202

  • 723,000 businesses now in 'significant financial distress1', a 15% increase from Q4 2020 to Q1 2021 (almost 100,000 increase)
  • 42% year-on-year increase in 'significant financial distress1' (213,000 businesses) since Q1 2020
  • Number of businesses in significant financial distress increased in all 22 sectors analysed by this research in the last quarter

The latest Red Flag Alert research for Q1 2021 has recorded 723,000 businesses in 'significant financial distress1' after the largest numerical quarterly leap (93,000) recorded in the research since its new version was launched in 2014. This 15% increase (from 630,000 in Q4 2020) comes as the UK starts its exit from lockdown.

This newly published research from Begbies Traynor also found that there has been a 42% increase in significantly distressed companies since Q1 2020 (509,000 - Q1 2020, 723,000 - Q1 2021) with financial distress in the transportation and logistics sector increasing by 56% (12,191 - Q1 2020, 19,055 - Q1 2021), the real estate and property services sector increasing by 51% (56,482 - Q1 2020, 85,165 - Q1 2021), the financial services sector by 50% (12,975 - Q1 2020, 19,466 - Q1 2021) and within the construction sector by 47% (65,564 - Q1 2020, 96,557 - Q1 2021).

Every one of the 22 sectors monitored by the Red Flag Alert research exhibited an increase in significant financial distress, with 19 sectors experiencing double-digit increases in the first quarter of 2021. This is a very concerning sign for the UK economy and highlights the deteriorating financial situation for many companies.

Insolvency Numbers Artificially Supressed

As reported in the last quarterly numbers the pandemic continues to adversely affect court action against indebted companies with the number of CCJs3 and winding up petitions both substantially below pre-Covid levels, partly due to a ban on winding up petitions with regard to Coronavirus related debts.

Data shows there were 23,325 CCJs lodged against companies during January, February and March in 2020, with only 9,377 lodged during the same period in 2021, a fall of 60%. The situation is even more acute with regard to more serious winding up petitions. During January, February and March 2020, 715 were lodged compared to just 15 during the same period in 2021, a fall of 98%.

Additionally, the average value of judgements increased from £6,033 in Q4 2020 to £6,127 in Q1 2021.

Julie Palmer, Partner at Begbies Traynor, said:

"The dam of zombie businesses could be about to break. The last 12 months have undoubtedly been some of the hardest that many businesses have ever encountered. We must remember that this is no ordinary recession and while businesses have had significant assistance from central government, large parts of the economy have been put on hold with substantially reduced revenues.

"Opening the doors of consumer-facing businesses on April 12th may well seem like a big step in the right direction for many of these companies as they try to shake off the traumatic trading of the last 12 months. However, our experience shows that unmanageable levels of debts and subsequent overtrading are likely to be the hidden icebergs waiting to sink even the highest profile businesses.

"However, businesses that were profitable before the pandemic, have manageable debt and are still relevant in the post pandemic world could flourish and be the real winners in this climate. They need guidance and need to act quickly. In a market that is moving fast dithering companies will be swept away in the sheer force of distress that is forcing its way across the UK."

Sectors

The transportation and logistics sector has experienced a very difficult time despite much of the economy relying on a network of household deliveries to survive. With many large players dictating the market, there has been a 56% year-on-year and 23% (15,515 - Q4 2020, 19,055 - Q1 2021) quarter-on-quarter increase in significant financial distress in this sector, with the new export rules around Brexit proving a headache for many smaller operators.

Despite the booming residential property market, the whole real estate and property sector - a key indicator of the economy's performance - has seen another 11,000 businesses enter significant distress in the last quarter and rise by 15% (73,952 - Q4 2020, 85,165 - Q1 2021), with a leap of 51% since the same period last year.

Construction businesses have also been impacted, despite building activity continuing even during lockdowns. There are now 96,557 construction businesses in significant distress, a year-on-year increase of 48% and a quarterly increase of 21% (80,018 - Q4 2020, 96,557 - Q1 2021).

UK Regions

London's reliance on both the leisure & hospitality and financial services sectors has made it particularly vulnerable to the short-term effects of Covid. Businesses in London experienced a significant 46% year-on-year increase in significant financial distress, and a 14% quarter-on-quarter increase (130,262 Q1 2020, 167,591 - Q4 2020, 190,829 - Q1 2021). However, Northern Ireland (9,822 - Q4 2020, 11,619 - Q1 2021) and the North West (59,915 - Q4 2020, 70,496 - Q1 2021) showed the most alarming quarterly increase of 18%.

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

"With the UK insolvency rate estimated to rise by more than 50% in 2021 these latest red flag figures make for grim reading.

"Despite the unprecedented central government support offered to UK businesses it is now clear that many companies are struggling under the weight of increased debt combined with poor revenue streams.

"The termination of this support will leave many businesses exposed to the true scale of their debt, and in many cases this will be simply unsustainable, with research indicating that some companies will be unable to even meet their interest repayments. This rise of insolvencies will not just be the well documented "Zombie" businesses but credible businesses who have suffered disproportionately because of the pandemic.

"The availability of Credit Insurance is also likely to be a factor as cover is either withdrawn, restricted or simply becomes too expensive for companies.

"Additionally, the re-opening of the economy also presents hidden risks for many companies. Overtrading will be a real risk for many and companies should monitor their cashflow very carefully - especially as credit lines have been stretched to breaking in many cases.

"However, the longer-term worry for the UK businesses are the structural changes the pandemic has brought to many aspects of our life. While some might say that the changes to the retail landscape were long overdue, with a move to online trading, other sectors will be impacted longer term by changing customers' needs. All businesses should take seriously these threats, examine their model and adapt if they are going to survive."