Critical corporate financial distress levels jump as businesses deal with the deteriorating economic environment

Business Health Statistics

| October 19th 2022

More News by Julie Palmer

Date Published: 19th October 2022

Critical corporate financial distress levels jump as businesses deal with the deteriorating economic environment
  • There has been a considerable increase in the number of businesses in critical financial
    distress over the last year, with a 25% increase in Q3 22 compared to Q3 21.
  • Bars & Restaurants and General Retailers continue to be major drivers of this increase in
    critical financial distress, up 48% and 72% respectively, increases in Leisure and Cultural
    Activities, up 36%, and Media, up 48%, when comparing Q3 22 to Q3 21.
  • There are nearly 610,000 companies in significant financial distress, representing an 8%
    year on year increase (Q3 22 v Q3 21) and a 4% quarter on quarter increase.
  • Significant financial distress has increased quarter on quarter (Q2 22 v Q3 22) across all
    22 sectors covered by this Red Flag research.
  • 17,637 county court judgements (CCJs) were served against businesses during Q3 22 –
    bringing the total for the first nine months of 2022 to 63,831.
  • There have now been more CCJs in the first nine months of 2022 than in the entirety of
    2021 or 2020, and the second highest level for the first nine months of a year since 2010.

The latest Begbies Traynor Red Flag alert report, which has provided a snapshot of British corporate health for the past 15 years, paints a worrying picture for UK businesses as an increasing number are now falling victim to the exceptional economic pressures that continue to build in the economy.

The latest data reveals that the number of companies rated as being in “critical financial distress” continued to rise rapidly in the third quarter of 2022, jumping by 25% compared with the same period in 2021 to 2,090, and up 7% versus Q2 2022.

With the official rate of inflation in excess of 9%, and inflation in the ‘real economy’ likely exceeding this, businesses now face the very real prospect of interest rates climbing above 5%, a move that could force distressed businesses to enter insolvency as debt built up over the last decade and rapidly added to during the pandemic becomes unserviceable.

Many of these ‘zombie’ businesses, which benefitted from Government-backed Covid support loans, now face a series of risks ranging from soaring interest rates, to rising costs and declining demand, meaning that in many cases the growing challenges may prove too much.

The most recent company CCJ data reveals further evidence of the level distress in the economy today. Often an early indicator of financial distress, the data shows the number of CCJs for the first nine months of 2022 was 63,831 – more than the entirety of either 2021 or 2020 and nearly the second highest total since 2010.

Similarly, Winding Up Petitions, a much more serious action lodged by creditors, were 237% higher than the same period 2021, showing that companies are utilising aggressive legal enforcement measures to recoup debts.

Sectors with the highest number of critically distressed businesses;

  • Construction
  • Support Services
  • General Retailers
  • Real Estate & Property Services
  •  Bars & Restaurants
  • Automotive
  • Other Manufacturing
  •  Industrial Transportation & Logistics
  • Food & Drug Retailers
  • Telecommunications & Information Technology
  • Financial Services

(Ranked by number of companies in critical financial distress)

Julie Palmer, partner at Begbies Traynor, said the growing number of companies in a critical
financial distress was of particular concern:

“We are now in an environment that we have not seen for many years, with a dangerous mix
of rapidly rising inflation, escalating interest rates and crumbling consumer confidence.

“The economy, which had already been weakened by two years of pandemic disruption, now
faces the very real possibility of a recession at a time when businesses were in desperate
need of a sustained period of stability so they could get back on their feet.

“What we have instead is a situation where input costs are soaring and businesses that
borrowed to survive for years and are stuck with levels debt that they may be unable repay –
especially with interest rates expected to rise to circa 6% in 2023.

“The economic turmoil is also having a stark effect on consumer confidence, and I remain
particularly concerned about sectors most exposed to discretionary consumer spending,
namely Bars & Restaurants, Leisure, and General Retailers. These businesses were some of
the worst affected by pandemic chaos and now their customers are reining in discretionary
spending, something we can clearly see in this Red Flag data.”

She added that her own conversations with the directors of distressed business are showing
widespread evidence of fatigue across SMEs.

Julie Palmer added: “After several years of volatility, the directors of businesses up and down
the country are now facing very difficult decisions. They must decide whether to soldier on or
give in, as they realise their businesses may not be viable if interest rates continue to rise as
many economists expect.

“For the time being, many will continue to resist but interest rates will continue to rise, energy
costs will remain stubbornly high, despite the Government’s intervention, and consumers are
reining in spending, so the future is far from bright when we look into 2023.

“I fear that many directors who fought through Covid will soon conclude that getting through
2023 and 2024 is a bridge too far after the troublesome period they have just battled through.”

Ric Traynor, executive chairman of Begbies Traynor, commented:

“This latest data clearly shows that many UK businesses are struggling as the macroeconomic
backdrop continues to deteriorate.

“Unfortunately, things are only likely to get worse, especially while we have the conflict in
Ukraine, an ever-strengthening dollar, and a lack of complete clarity on the UK’s fiscal plan.
Inflation remains at levels not seen in 40 years and companies that have been burdened with
high levels of debt are now seeing interest rates rise rapidly. For many, this will simply be too
much.

“With consumer confidence where it is, it feels like we are heading towards a bleak winter and
2023 and, after two years of extensive financial support for businesses, the Government has
little left in reserve to help businesses to ride out this economic storm.”


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 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.

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