Begbies Traynor Plc - Latest Red Flag Alert Report for Q3 2020
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Begbies Traynor Plc
Latest Red Flag Alert Report
557,000 UK businesses now in significant distress as numbers rise
- 557,000 businesses now in 'significant distress1' following biggest increase in quarterly distress since 2017 (6% increase of 30,000 from Q2 2020 to Q3 2020)
- 9% increase in 'significant distress1' (48,000 businesses) since the March lockdown
- Double-digit increases in 'significant distress' since Q1 for real estate (11%), food and drug retailers (14%) and bars and restaurants (10%)
The latest Red Flag Alert research for Q3 2020 has recorded 557,000 businesses in 'significant distress1' after the largest quarterly leap in financially distressed companies since 2017. This 6% increase (from 527,000 in Q2 2020) in the last three months comes despite a backlog of court action preventing many CCJs and winding up petitions being issued.
This newly published research from Begbies Traynor, also finds that there has been a 9% increase in significantly distressed companies since the end of the first quarter (509,000 Q1 2020, 557,000 Q3 2020) - two weeks into lockdown.
Since this time there have been double-digit percentage increases in financial distress in 10 out 22 sectors analysed. This includes food and drug retailers (14%, 13,018 Q1 2020, 14,806 Q3 2020), construction (11%, 65,456 Q1 2020, 72,402 Q3 2020) and real estate and property (11%, 56,421 Q1 2020, 62,615 Q3 2020) sectors.
The rise could have been much higher, were it not for reduced court activity due to the coronavirus pandemic, which has limited the number of CCJs and winding up petitions being issued against indebted companies and the ban on winding up petitions for Covid related debts.
Data shows there were 26,244 CCJs lodged against companies during July, August and September in 2019, with only 10,045 lodged during the same period in 2020, a fall of 62%. The situation is even more acute with regard to more serious winding up petitions. During July, August and September 2019, 1,019 were lodged compared to 101 during the same period in 2020, a fall of 90%.
Julie Palmer, Partner at Begbies Traynor, said:
"It is noteworthy that the number of businesses in significant distress have grown substantially in the last three months, even with court capacity significantly reduced due to the pandemic. With so many businesses limping along there could be a flood of insolvencies when the courts do get back to anywhere near normal capacity and attempt to clear the backlog of pending cases. This in itself, combined with the end of the furlough scheme and other government support measures, is likely to have a material impact on the UK business failure rate.
"Unfortunately for the many zombie companies in existence across the UK, a perfect storm is on the horizon. A combination of a grim economic backdrop and very poor trading conditions, particularly in the most vulnerable sectors, such as hospitality will take its toll and this is expected to feed through to Q1 2021, particularly when the government ends its high profile corporate life support measures."
Even though all 22 sectors measured by the Red Flag Alert, research showed an increase in significant distress since the start of the year, some sectors have experienced a harder fall than others in the last quarter, including those which have been thriving since reopening;
Real Estate & Construction
In the last quarter alone almost 4,500 construction businesses have fallen into significant distress - an increase of 7% to 72,402. With 9% more commercial builders (2,602 Q2 2020, 2,824 Q3 2020) and 8% more house builders (6,871 Q2 2020, 7,405 Q3 2020) in significant financial distress many businesses in the sector are feeling the pain of coronavirus.
Even though there have been encouraging signs for the real estate sector, it has failed to recover from the industry grinding to a halt with an additional 3,700 businesses struggling. This increase of 6% since the first quarter means there are now 62,615 companies in distress, a year-on-year increase of 23% (51,113 Q3 2019, 62,615 Q3 2020) - the largest year-on-year increase across the 22 sectors.
Hospitality and Retail
The hospitality sector has unsurprisingly been hit hard and that is now starting to show with a 10% increase in distressed bars and restaurants since the start of lockdown (18,011 Q1 2020, 19,760 Q3 2020), and a 5% increase in the last quarter alone (18,750 Q2 2020, 19,760 Q3 2020). These numbers are likely to be understated because of the reduced court activity and other short-term protection measures which will at some point come to an end and the true impact will be revealed.
Retail continues to be hit hard as well. While the entire industry saw a 9% increase in distressed companies since the start of lockdown (32,495 Q1 2020, 35,448 Q3 2020), there was another story to be told with regard to online, fashion and high street retailers. Since the start of lockdown there has been an 11% increase in online retailers in distress (9,374 Q1 2020, 10,433 Q3 2020), with 8% more fashion retailers in trouble vs the start of lockdown (3,510 Q1 2020, 3,783 Q3 2020). The accelerated move to online sales has not helped every business, however, the significantly larger numbers of high street retailers also witnessed a large increase of 7% (18,464 Q1 2020, 19,718 Q3 2020).
At the end of Q3 2020 almost 17,000 automotive businesses were in distress - an increase of more than 1,000 since the start of lockdown (15,311 Q1 2020, 16,878 Q3 2020). Many of these businesses sit within the automotive supply chain, which has a stronghold in the Midlands, where 10% more businesses are in distress than at the start of lockdown (60,482 Q1 2020, 66,545 Q3 2020). Unfortunately, with the UK potentially heading for a no deal Brexit, the outlook for this sector looks somewhat bleak.
Ric Traynor, Executive Chairman of Begbies Traynor Group plc, commented:
"The Government's well publicised support measures have saved thousands of businesses from certain insolvency in the short term, but the recently launched reduced version of the furlough scheme and the end to Government guaranteed loans will serve to give many businesses a brutal reality check.
"In fact, many of these businesses were debt laden before the pandemic struck and had little prospect of a viable turnaround. They have seen their life prolonged by the availability of Government loans and employee cost subsidies, as evidenced by the 30% + fall in insolvencies over the last six months. Inevitably their underlying lack of profitability and accumulated debt will catch up with them once the subsidies end and they face the harsh realities of the challenging economic environment.
"What is uncertain is whether these same government schemes will be enough to shield the businesses which were viable pre Covid and allow them to prosper once again when the "new normal" appears.
"With the UK's service-based economy almost certain to experience permanent changes brought about by the coronavirus pandemic a comprehensive government-backed retraining programme for those employees affected by these changes is needed as many people will be forced into career changes and require the appropriate skill sets for the post-pandemic world."