Latest Red Flag Statistics

Begbies Traynor, the leading business rescue, recovery and restructuring specialist, today releases its Q2 2010 Red Flag Alert statistics, which monitor the early warning signs of company distress. The key headlines are as follows:

The number of businesses facing financial distress has fallen by 21% since Q1 2010
The £69.5bn of liabilities at risk of default is up 26% from £55bn in Q1 2010
Average debts of troubled companies have risen 60% to c. £545,000 in Q2 2010 (Q1 2010: c.£340,000)
52,000 companies already experiencing distress in the sectors most dependent on public sector spending (construction, IT, recruitment, advertising and business services)
Outlook for corporate credit availability for Q2 2010 at its lowest level since the end of 2008
Begbies Traynor expects the levels of insolvencies to rise again in H1 2011

Introduction

Over 127,000 companies experienced ‘significant’ or ‘critical’ financial distress in Q2 2010 between them owing over £69.5bn to creditors, suppliers and service providers.

Although the numbers of companies experiencing distress have fallen (by 21% compared to 161,601 in Q1 2010 and by 31% compared to previous peak levels of 185,813 in Q2 2009), they remain at historically high levels (up 15% from 111,089 in Q2 2008).

The £69.5bn of liabilities at risk of default by businesses experiencing financial distress has increased by 26% from £55bn in Q1 2010, representing a 60% increase in the average debts of troubled companies to c.£545,000 (Q1 2010: c.£340,000). This suggests that larger companies are now experiencing difficulties, implying that the post-recession stress is migrating out of the SME sector to affect more significant businesses and therefore, potentially threatening greater job losses; indicating the continued fragility of the UK’s weak economic recovery.

Ric Traynor, Executive Chairman of Begbies Traynor Group, said:

“We believe that a combination of lenient creditor attitudes and temporary government support measures, including the extensive use of monetary instruments, such as quantitative easing and low interest rates, have all had an effect on reducing the volume of adverse actions, providing a welcome respite to many companies that may have otherwise found it difficult to survive.”

Traynor added: “However, we are concerned that the levels of business distress will increase again, potentially from the first half of 2011, once the full effects of the coalition government’s fiscal tightening measures impact the economy and particularly amongst those private sector businesses most dependant on public sector contracts. Thereafter, the levels of distress can be expected to remain pronounced for a number of successive quarters in line with the experience of recessions over the past 35 years, when the level of insolvencies grew strongly for two to four years after GDP stopped shrinking.”

Credit conditions and creditor attitudes

The Bank of England’s Credit Conditions survey reported that the overall availability of credit to corporates increased in Q2 2010. However, this increase was significantly lower than expected – a balance of just 7.1% of lenders reported an increase compared to a balance of 22.7% of lenders which had previously expected an improvement in corporate credit availability.

Perhaps more significantly, the outlook for corporate credit availability for Q3 2010 is now at its lowest level since the end of 2008 with a balance of 6.5% of lenders expecting an increase in corporate credit availability compared to a range of 20.5 – 28.9% in the five consecutive quarters to Q1 2010 (Source: The Bank of England’s Credit Conditions survey).

We are also seeing growing evidence of less lenient creditor attitudes. HMRC is applying greater scrutiny to applications for its Business Support Scheme (“Time to Pay”). It introduced an Independent Business Review for applications over £1m in April 2010 whilst there is also evidence of higher rates of rejection of VAT deferral applications, particularly for larger sums.

Traynor added: “HMRC’s increased scrutiny for applications to its time to pay scheme, provide early indications that it is taking a more selective stance towards businesses over their outstanding liabilities with a focus on helping businesses that have a genuine chance of survival.”

Sector analysis

Whilst the government’s well reported austerity measures will be felt widely, the sectors most directly dependent on public sector spending include construction, IT, recruitment, advertising and business services. In these sectors alone, almost 52,000 companies were experiencing financial distress in the second quarter of 2010 before the full effects of fiscal tightening initiatives. In particular, Construction and IT have shown a much lower rate of recovery in the second quarter than other sectors, showing year on year improvements of 17% and 16% respectively compared to an average improvement across all sectors of 31%.

Traynor added: “It will not be until after the Government’s Comprehensive Spending Review in October that we will know for certain the allocation of spending cuts, but there is a growing risk that, even if the UK avoids a double dip recession, it could develop a twin track economy, with public-sector dependent industries facing higher levels of financial distress than sectors which are less directly linked to government spending cuts.”

The manufacturing and retail sectors were among those showing the strongest year on year improvements, with reductions in businesses experiencing financial distress of 37% and 38% as they benefitted from improved export and consumer demand respectively.

Traynor added: “The manufacturing sector had been expected to play a major role in an export-led recovery, but recent weak economic data from China and the US, the challenges facing much of the Eurozone and concerns over too many simultaneous domestic austerity programmes amongst G20 countries are leading some economists to question the potential for the UK to heavily rely on exports for growth, whilst sharp increases in input cost inflation put further pressure on many business in the sector.”

“Levels of financial distress have improved significantly in the retail sector but the impact of the government’s austerity measures on salaries and jobs are yet to come, whilst the sector will also be faced with an increase to a 20% VAT rate in the middle of its important January 2011 sale period.”

Summary

The increasing uncertainty surrounding the outlook for the UK economy represents a further significant challenge for UK corporates at a time when many had been preparing their businesses for recovery. With over £69.5bn of liabilities still at risk of default, the potential ripple effect of current levels of distress could be far-reaching.

Traynor commented: “The coalition government is trying to strike a fine balance between reducing the UK’s deficit and maintaining the recovery. Given the substantial liabilities at risk of default by businesses in distress, government support measures will need to be withdrawn gradually to avoid tipping that balance towards halting the recovery.”

Q2 2010 Red Flag Alert Statistics

‘Significant’ and ‘Critical’ problems by Sector:

Sector
Q2 2009
Q2 2010
Percentage
Change
Q1 2010
Q2 2010
Percentage
Change
Automotive
4,544

3,007

-34%

4,178

3,007

-28%

Construction

20,566

17,033

-17%

22,990

17,033

-26%

IT

8,196

6,906

-16%

8,203

6,906

-16%

Engineering

2,160

1,799

-17%

2,131

1,799

-16%

Print & Packaging

2,436

1,891

-22%

2,322

1,891

-19%

Manufacturing

8,692

5,477

-37%

6,820

5,477

-20%

Financial Services

3,943

2,604

-34%

3,037

2,604

-14%

Property Services

20,707

12,595

-39%

16,385

12,595

-23%

Hire/Rental Services

1,457

952

-35%

1,145

952

-17%

Recruitment

2,008

1,281

-36%

1,725

1,281

-26%

Advertising

1,245

705

-43%

996

705

-29%

Professional Services

10,868

7,265

-33%

9,620

7,265

-24%

Business Services

36,701

25,786

-30%

30,891

25,786

-17%

Retail

14,415

8,994

-38%

12,156

8,994

-26%

Wholesale

8,006

5,099

-36%

6,236

5,099

-18%

Transport & Comms

7,233

4,802

-34%

5,996

4,802

-20%

Others

32,636

21,307

-35%

26,770

21,307

-20%

UK Total

185,813

127,503

-31%

161,601

127,503

-21%