finance

Experts' report warns wave of zombie insolvencies to come



A record 527,000 UK businesses were in “significant financial distress” at the end of June – up 30,000 since the new year, according to the latest Red Flag Alert report from Begbies Traynor.

But the true picture of companies in trouble will not emerge until government aid such as the furlough scheme is rolled back, the insolvency specialist warned.

Begbies Traynor partner Julie Palmer said: “The latest figures from our Red Flag Alert research show 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.”

Begbies Traynor recorded Q2 2020 as the seventh consecutive quarter of increased financial impairment. It said the 527,000 businesses in “significant” distress would have been more if coronavirus had not disrupted court judgments against businesses struggling to pay their bills.

The data showed there were only 10,766 County Court Judgments lodged against companies in March, April and May, down from 18,107 a year ago. There were only 247 winding up petitions in Q2, compared with 926 for that period in 2019. Significant’ distress is defined as having a CCJs of less than £5,000 against them.

The report said: “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.”

The report looked at how many companies were in significant distress in different sectors of the economy.

Real estate & construction

In the last quarter 17,000 businesses fell into distress, with 6% more commercial builders and 4% more house builders and 19% more real estate firms.

Automotive

At the end of Q2 almost 16,000 automotive businesses were in distress – up by more than 1,000 since the same time in 2019.

Sports & health clubs

Almost 10,000 of these businesses adversely affected at the end of Q2, up 1,000 in the last year.

Bars, restaurants and retail

Number of online retail businesses in distress has increased by 7% since the start of the year, 7% for fashion retailers and 6% in high street retailers.

A 6% increase in bars and restaurant businesses in distress since the start of the year and 4% increase in the last quarter. Pubs were up 6% in the last quarter and 9% since the start of the year.

Ric Traynor, executive chairman of Begbies Traynor Group, said: “There has been unprecedented company support measures from the Treasury during the pandemic.

“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.

“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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