The latest Red Flag Alert research for Q2 2020 has recorded seven consecutive quarters of increased financial impairment resulting in a record 527,000 businesses in significant* financial distress at the end of June 2020 - an increase of 33,000 since the beginning of the year.
This newly published research from Begbies Traynor, also finds that this represents a considerable increase of 7% since the start of the year, and 9% year on year. The rise 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.
Our own data shows there were 18,107 CCJs lodged against companies during March, April and May in 2019, with only 10,766 lodged in the same period during 2020, a fall of more than 40%. The situation is even more profound with regard to the more serious winding up petitions. During March, April and May 2019, 926 were lodged compared to 247 during the same period in 2020, a fall of 73%.
Even though all 22 sectors (measured by the Red Flag Alert research) showed an increase in significant distress, 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 Begbies Traynor, said:
“The latest figures from our Red Flag Alert research show that there is a dam of company financial distress waiting to break upon the UK economy. Despite more than 30,000 businesses having fallen into distress since the start of the year, the real level of corporate underperformance is being concealed by inaction on distressed businesses in the courts.
"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. Going forward, businesses that have the capital and the management ability, will adapt to the new normal and likely flourish at the expense of weaker rivals.
“It is likely that this situation will get worse for many businesses before it gets better, but those that can operate and adapt to these conditions will survive the flood and live to prosper on the other side.”
Real Estate & Construction
In the last quarter alone more than 17,000 businesses have fallen into distress, with 6% more commercial builders (2,466 Q1 2020, 2,602 Q2 2020) and 4% more house builders (6,633 Q1 2020, 6,871 Q2 2020) in significant financial distress.
The deteriorating financial performance of the real estate sector is brought into sharp focus with a 19% increase in significant financial distress between Q2 2019 (49,549) and Q2 2020 (58,844), with a further 4% increase between Q1 2020 (56,482) and Q2 2020 (58,844). The construction sector also exhibited poor financial performance with a 9% year on year increase in distress (62,563 Q2 2019, 67,917 Q2 2020) and a 4% quarter on quarter increase (65,564 Q1 2020, 67,917 Q2 2020).
Practically all sectors are showing worrying increases in financial distress, particularly those dependant on consumer income. At the end of Q2 2020 almost 16,000 automotive businesses were in distress – an increase of more than 1,000 since the same time in 2019 (14,792 Q2 2019, 15,858 Q2 2020). Many of these businesses sit within the automotive supply chain, which has a stronghold in the Midlands, therefore we could see this impacting the regional distress levels over future quarters.
Sports & Health Clubs
Not surprisingly sports and health clubs suffered disproportionately and over the past year more than 1,000 additional businesses within this sector have encountered significant financial distress. There are now almost 10,000 of these businesses adversely affected at the end of Q2.
However, the extensive Government support measures have masked the true extent of the distress within this sector, as well as the hospitality and retail sectors, and is only likely to become apparent once the Furlough scheme is removed.
Bars, Restaurants and Retail
Despite the ONS reporting a 20% increase in online retail sales during May much of the retail sector has felt the negative effects of coronavirus since the start of the year. The number of online retail businesses in distress has increased by 7% (9,117 Q4 2019, 9,756 Q2 2020) since the start of the year, with a 7% (3,365 Q4 2019, 3,600 Q2 2020) increase for fashion retailers and 6% (17,771 Q4 2019, 18,814 Q2 2020) increase in high street retailers.
For the Bars and Restaurant sector the news is similar. A 6% increase since the start of the year and a 4% increase in the last quarter (17,620 Q4 2019, 18,011 Q1 2020, 18,750 Q2 2020). Unsurprisingly, pubs bear the brunt of that increase with a 6% rise in the number of businesses in significant distress in the last quarter alone, and a 9% increase since the start of the year (4,976 Q4 2019, 5,108 Q1 2020, 5,420 Q2 2020).
Ric Traynor, Executive Chairman of Begbies Traynor Group plc, commented:
“There has been unprecedented company support measures from the Treasury during the pandemic, with both the Furlough scheme and access to government backed funding schemes. But unfortunately, as the chancellor himself has admitted, not all businesses and jobs can be saved.
“Many of these support measures will have simply delayed the inevitable, with the can being firmly kicked down the road. Many 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.
“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. We have already seen some businesses in the affected sectors make significant alterations to their structures but unfortunately we expect to see many more cease to trade in the coming months. However a crisis can be an opportunity to strengthen and create more sustainable jobs in the future but undoubtedly this restructuring will be painful over the next few years.”
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