Begbies Traynor Group PLC Latest Red Flag Alert Report for Q4 2020

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Begbies Traynor Group PLC

21 January 2021

Embargoed until 00:01 on 21.01.2021

630,000 UK businesses now in significant financial distress as

new lockdown comes into effect

-- 630,000 businesses now in 'significant distress(1) ', a 13% increase from Q3 2020 to Q4 2020 (largest numerical quarterly increase since Q2 2017)

-- 27.5% year-on-year increase in 'significant distress(1) ' (136,000 businesses) since Q4 2019

   --      Financial distress increases across all 22 sectors monitored by this research 
   --      London experiences a 33% increase in significant financial distress since Q4 2019 

The latest Red Flag Alert research for Q4 2020 has recorded 630,000 businesses in 'significant distress(1) ' after the largest numerical quarterly leap (73,000) in financially distressed companies since Q2 2017. This 13% increase (from 557,000 in Q3 2020) comes as the UK is plunged into another nationwide lockdown.

This newly published research from Begbies Traynor also found that there has been a 27.5% increase in significantly distressed companies since Q4 2019 (494,000 - Q4 2019, 630,000 - Q4 2020) with financial services increasing by 38% (12,587 - Q4 2019, 17,423 - Q4 2020), real estate and property services increasing by 39% (53,224 - Q4 2019, 73,952 - Q4 2020) and hotels and accommodation increasing by 32% (5,659 - Q4 2019, 7,494 - Q4 2020).

Every one of the 22 sectors monitored by the Red Flag Alert research exhibited an increase in significant distress, with 18 sectors experiencing double digit increases in the final quarter of 2020 - a worrying sign for the UK economy. This highlights the deteriorating financial situation for many companies.

Tip of the Iceberg

However, it is likely that these figures are the tip of a very large iceberg. The coronavirus pandemic has reduced court activity limiting the number of CCJs(3) and winding up petitions being issued against indebted companies and there has been a ban on winding up petitions for Covid-related debts.

Data shows there were 14,030 CCJs lodged against companies during October, November and December in 2019, with only 9,716 lodged during the same period in 2020, a fall of 31%. The situation is even more acute with regard to more serious winding up petitions. During October, November and December 2019, 644 were lodged compared to just 94 during the same period in 2020, a fall of 85%. Additionally, the average value of judgements has more than doubled from GBP2,790 in Q3 2019 to GBP5,844 in Q3 2020, with the median value up 153% from GBP902 to GBP2,280, showing that larger judgements are still be actioned compared to smaller judgements.

Julie Palmer, Partner at Begbies Traynor, said:

"These figures give an insight into some of the financial stresses that have been building in UK business. Without the financial aid and support measures that the Government has put in place during the pandemic insolvency levels would have been much higher, however the sad truth is that for many companies this will provide little more than a stay of execution as debt levels become unmanageable and structural changes across many sectors take their toll.

"The announcement of the latest national lockdown will do little to help and even the chancellor has reiterated that he cannot save every business. And the harsh reality is that the Government will have to be ruthless when handing out rescue funds, because not all businesses will be sustainable, even when the flood waters subside.

"Although the Government has extended its Covid-19 financial support, this simply won't be enough for thousands of businesses who likely will not survive in the interim. Although the UK's announcement of a trade deal with the EU and the roll-out of Covid-19 vaccines offer some light at the end of a very dark tunnel, the situation is going to remain bleak over the next quarter and beyond."

Sectors

The financial services sector has had a torrid time with a 38% year on year and 24% quarter on quarter increase in significant financial distress as the effect of the pandemic bites. The short term outlook for this sectors remains uncertain not helped by a lack of a Brexit trade deal for financial services and ongoing uncertainty around equivalence.

Despite the booming residential property market the whole real estate and property sector - a key indicator of the economy's performance - has seen 11,000 businesses enter significant distress and rise by 18% in the last quarter (62,615 - Q3 2020, 73,952 - Q4 2020), while there has been a leap of 39% compared to the same period last year (53,224 - Q4 2019, 73,952 - Q4 2020).

Construction businesses have also seen an impact, despite activity being able to continue during lockdowns. There are now 80,018 construction businesses in significant distress, a year-on-year increase of 27% (63,209 - Q4 2019, 80,018 - Q4 2020) and a quarterly increase of 11% (72,402 - Q3 2020, 80,018 - Q4 2020).

Unsurprisingly, the hospitality sector continues to be one of the hardest hit sectors by Covid-19 with government restrictions forcing thousands of businesses to close or limit their operations. This has been evidenced by an 18% increase for hotel and accommodation businesses in significant distress in the last quarter (6,327 - Q3 2020, 7,494 - Q4 2020), and a 32% increase compared to the same period last year (5,659 - Q4 2019, 7,494 - Q4 2020). However, these numbers are likely to be understated due to the short-term financial support options available which will be keeping thousands on artificial life support.

UK Regions

The Capital's dependence on the financial services and hospitality sectors is laid bare in this research, with London businesses experiencing a huge 33% year on year increase in significant financial distress, and a 17% quarter on quarter increase. However Northern Ireland businesses shows the sharpest deterioration with a considerable 40% increase in significant financial distress since Q4 2019, a situation likely to be complicated by post Brexit border complications.

Ric Traynor, Executive Chairman of Begbies Traynor Group plc, commented:

"UK businesses have been dealt another body blow by the latest national lockdown. 2020 was a devastating year for thousands of businesses as they fell deeper into financial distress and Q1 2021 seems to be offering little hope of an upturn in the market. The Government's extended furlough and financial support measures will provide some relief and certainly save a significant number of businesses from entering into insolvency in the short term.

"There are many zombie businesses that have been hanging on by a thread for years before this pandemic. The period post government support may well see a shake out of these struggling businesses and ultimately leave the stronger businesses to grow and create a more robust and dynamic economy in the medium term."

-S -

1 'Significant' distress is those businesses with minor CCJs (of less than GBP5k) filed against them or which have been identified by Red Flag Alert's proprietary credit risk scoring system which screens companies for a sustained or marked deterioration in key financial ratios and indicators including those measuring working capital, contingent liabilities, retained profits and net worth.

2 'Critical' distress are those businesses with minor CCJs (of more than GBP5k) filed against them

3 In England and Wales, County Court Judgments (CCJs) are legal decisions handed down by the County Court. Judgments for monetary sums are entered on the statutory Register of Judgments, Orders and Fines, which is checked by credit reference agencies to assess the credit-worthiness of individuals and businesses.

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Notes to Editors:

About Red Flag Alert

Red Flag Alert has been measuring and reporting corporate financial distress since 2004, and over that time has become an industry benchmark of the underlying health of companies across every sector and region of the UK.

Through its unique algorithm, the Red Flag Alert measures corporate distress signals, drawing on factual legal and financial data from a wide range of relevant sources, including intelligence from the UK's leading insolvency business, Begbies Traynor. Please note that the Red Flag Alert algorithm was refreshed in Q3 2017 to enhance the risk factors analysed in the data. The reported results have been backdated to ensure consistency of comparative data.

The release refers to the numbers of companies experiencing 'Significant' problems, which are those with minor CCJs (of less than GBP5k) filed against them or which have been identified by Red Flag's proprietary credit risk scoring system which screens companies for a sustained or marked deterioration in key financial ratios and indicators including those measuring working capital, contingent liabilities, retained profits and net worth.

Red Flag Alert is commercially available to all businesses, on an annual subscription basis, to help them better understand risk and exposure and help prepare them for the future. Further information about Red Flag Alert can be found at: www.redflagalert.com

Economically active businesses exclude those that are flagged by companies house as being, Non-trading, Listed for Strike off / Strike off pending, Insolvent or Dissolved. Companies where there is insufficient information available for RFA to assign a health rating are also excluded.

Begbies Traynor Group

Begbies Traynor Group plc is a leading business recovery, financial advisory and property services consultancy, providing services nationally from a comprehensive network of UK locations. The group has 735 staff and partners and the professional staff include licensed insolvency practitioners, accountants, chartered surveyors and lawyers.

The group's services include:

Business recovery and financial advisory

Corporate and personal insolvency - we handle the largest number of corporate appointments in the UK, principally serving the mid-market and smaller companies.

Corporate finance - buy and sell side support on private company transactions.

Financial advisory - forensic accounting and investigations, debt advisory, business and financial restructuring, due diligence and transactional support.

Property advisory and transactional services

Valuations - valuation of property, businesses, machinery and business assets.

Property consultancy, management and planning - building consultancy, commercial property management, specialist insurance and vacant property risk management, transport planning and design.

Transactional services - sale of property, machinery and other business assets through physical and online auctions; business sales agency; commercial property agency focussed on northern and eastern England.

Further information can be accessed via the group's website at www.begbies-traynorgroup.com/investor-relations

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January 21, 2021 02:00 ET (07:00 GMT)