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Begbies Traynor's Five Struggling Sectors to Watch in 2013

Begbies Traynor's Five Struggling Sectors to Watch in 2013

Julie Palmer, Partner at Begbies Traynor, the UK’s leading business recovery practice, provides her predictions of the five sectors most at risk of facing financial distress in 2013:

Aviation
"Research highlights that since the start of the 2008-2009 economic crisis, more than 30* European airlines have already ceased trading, with analysts believing that European airlines that rely heavily on state support are particularly vulnerable in the current economic environment. We expect the ongoing crisis in Europe, with its continuing austerity measures and low growth expectations, to severely hamper airlines' ability to increase airfares not least as higher-yield corporate customers become savvier about procuring best prices.

“These constraints come at a time when the industry is already facing a devastating increase to an existing levy in April 2013, the UK's Air Passenger Duty tax, which will add up to £188 to the cost of a ticket disproportionately affecting UK based carriers, particularly those operating internal flights. This combination of demand-side pricing pressure and an escalation in the cost of doing business, through taxation, will only serve to put further pressure on European airlines' balance sheets. Furthermore, with our Red Flag Alert system highlights that 32% of firms in the aviation sector are already facing significant or critical distress. These issues put companies right across the supply chain at risk of severe financial difficulties in 2013."
* Conducted by Australian research firm CAPA Centre for Aviation

Care Homes
“Our Red Flag Alert system shows that 29% of care home [firms in the UK] are facing significant or critical financial problems. The sector has been hard hit by economic malaise and austerity measures and despite the number of people over 65 in the UK exceeding those under 16, there has been an overall decline in occupancy in care homes. This is partly due to squeezed family budgets, but also a reduction in government spending with local authority budgets for social care reduced by more than £600m, or 8 per cent, between 2011 and 2012*.”

“The sector’s ability to cope with the current environment is hindered by a lack of management teams who are sophisticated enough to manage costs efficiently and drive new occupancy, combined with heavy indebtedness across much of the sector based on high loans-to-value which no longer reflect the current value of the properties and restrict management’s ability to refinance. We believe the sector is a ticking time bomb, with firms offering non-specialist care and operating from smaller occupancy homes, in particular, facing severe pressures on their finances in 2013.”
*Figures taken from Age UK report in July 2012:
http://www.ageuk.org.uk/Documents/EN-GB/Campaigns/care_in_crisis_2012_report.pdf?dtrk=true


Farming
“The rising cost of feed combined with poor crop growth, caused by the UK’s second wettest year on record has meant many farmers are currently unable to break even, let alone make a profit; Pig farmers and finishers have had a difficult year due to increased wheat and soya prices while smaller dairy farms, especially those in more remote locations, are being squeezed in a consolidating sector from larger dairy farmers positioned nearer to distribution hubs.

“The pressures on pricing is causing a tightening effect, with many farmers taking on second jobs to keep their farm going during these tough times. With their reserves already run down, we believe that unless farmers act quickly to diversify revenue streams from their land by exploiting alternative uses such as wind farms, the sector faces a substantial increase in financial distress in 2013.”

Local Authorities & Councils
“From 2013 local authorities will have greater power to decide how most of their grants from central government should be spent in their area, equipping them with greater autonomy to direct public money to the causes they view as most important for their local community. However, this change in responsibility does not address the real funding shortfall, with local government budgets being held down to deliver a freeze in council tax next year and a 2% reduction (£445m) in 2014-15, while the Local Government Association estimates that councils actually face a potential £1bn loss in funding in 2013-14 through technical funding changes.

“Our Red Flag Alert system, which monitors financial distress, highlights that a number of local authorities and borough councils are already exhibiting faltering payment behaviour even before these planned cuts to real budgets commence, with many more at risk due to over-investment of surplus funds. The funding challenges now leave local authorities facing a stark choice between making significant cuts to essential, frontline services, particularly Police Authorities, Fire Brigades and Prisons, or risk becoming financially unviable. Given that they have little room for manoeuvre, we expect a further increase in the financial difficulties of councils in 2013.”

NHS Trusts
“The financial health of a number of NHS Trusts is another key concern for 2013. The Public Accounts Committee recently revealed that 34 trusts ran up combined deficits of £356m in 2011-12 while a further 42 may not have broken even without additional funding from local health authorities or the Department of Health – representing over 18% of the 411 NHS organisations in total. With the NHS already facing unrelenting budget pressures from inflation, an aging population plagued with obesity issues, type 2 diabetes, alcohol and drug abuse, as well as cancer targets and the cost of new drugs and equipment, Trusts may struggle to find the £20bn of efficiency savings needed over the next five years to deliver their budgets.

“While the NHS is in surplus overall, it is clear that some trusts are near breaking point and our Red Flag Alert system reveals that there are already cracks appearing as teething problems related to changes in commissioning take time to bed in. With continued uncertainty as to how essential services can be reconfigured without damaging local access to quality health provision, combined with personnel issues and the increasing financial impact of blame culture and litigation from patients, it is clear that many Trusts could face further financial challenges in 2013 and ultimately the prospect of mergers or even closure.”

Julie Palmer

About the author

Julie Palmer

Regional Managing Partner

Meet our Team of Experts

Julie is a law graduate who qualified with Price Waterhouse in 1994. Julie joined Smith & Williamson in 1997 and became a partner in 2001. With Mike Stevenson, Julie set up Middleton Partners offices in Salisbury and Southampton, both of which are now part of Begbies Traynor.

Julie is a member of the Insolvency Practitioners Association and the None Administrative Receivers Association and is a Fellow of The Association of Business Recovery Professionals. Julie deals with all aspects of Corporate Recovery and turnaround work and takes all form of personal insolvency appointments.

Advice You Can Trust

Insolvency Practitioners Association Institute of Chartered Accountants in England and Wales R3: Association of Business Recovery Professionals ICAEW Business Advice Service Turnaround Management Association ACCA (the Association of Chartered Certified Accountants) ICAS | The Institute of Chartered Accountants of Scotland
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