Over 140,000 Companies Show Real Signs of Financial Distress in Q4 2009

Red Flag Alert is a monitor of early warning signs of company distress by Begbies Traynor, the UK’s leading business rescue, recovery and restructuring specialist. The latest report focussing on Q4 2009 released today contains the following headlines:

Over 140,000 companies experienced Significant and Critical financial problems in Q4 2009; 6% higher than in Q3 2009 but 14% lower than the same period in 2008, reflecting:

High levels of corporate distress, despite the positive effects of government fiscal stimulus, such as quantitative easing and the 2.5% VAT decrease, as well as other short term support initiatives, such as the HMRC’s much needed Business Payment Support Service (through which over 242,000 ‘time-to-pay’ arrangements have been agreed, totalling over £4.2bn in deferred tax liabilities).

A new trend emerging, which indicates that a higher number of business failures are occurring at an earlier stage of deterioration than in previous recessions.

A more lenient approach amongst creditors, compared to the near panic to recover debts and preserve cash amidst the chaos, a year ago when Lehman Bros and other major failures almost stalled world financial markets. However, HMRC remains one of the principal creditors in many insolvencies and we fear that when the current ‘time-to-pay’ scheme, which provided a lifeline to many businesses, is finished there will be a significant rise in company failures – most probably from Q3 2010 onwards.

Improved business confidence, witnessed by the ICAEW’s Business Confidence Monitor which showed that 60% of companies surveyed indicated more confidence in the economic outlook for their business, a reversal of the findings of the Q4 2008 survey when 63% of respondents were less confident. This is offset by indications that the rise in consumer confidence may have stalled

An analysis by sector shows that:

The Automotive sector saw the largest quarter on quarter increase in Critical actions (up 26% on Q3 2009) as well as one of the highest year on year rises (up 20% on Q4 2008), despite the extension of the car scrappage scheme.

The service sectors suffered more than the non-service sectors, with a 22% increase in Significant and Critical actions in Q4 2009 compared to Q3 2009.

The Retail sector saw a significant improvement with a 32% decline in Critical actions, compared to Q3 2009, or a 21% decline on Q4 2008 as improved consumer confidence, reduced capacity and the 2.5% VAT decrease culminated in increased sales over the Christmas period, as reported by some major multiple retailers. In addition, the traditional seasonal pattern shows relatively low levels of adverse actions in the retail sector in Q4, as creditors hold off from taking action while retailers realise cash during the important Christmas trading period.

Although the construction sector witnessed an improvement in Significant and Critical actions compared to Q4 2008, it remains particularly vulnerable as it has benefitted more than any other sector from HMRC’s time-to-pay scheme.

Companies heavily dependent on a public sector customer base are also expected to be particularly vulnerable, as the well documented public sector spending cuts become evident post the general election during 2010.

A regional analysis of the figures shows that Scotland, for the second quarter running, stands out as the only region showing a year on year increase of both Significant and Critical categories of adverse actions (up 2% and 41% respectively).

Ric Traynor, Executive Chairman of Begbies Traynor Group, said:

“Government support measures are providing welcome relief to the UK's struggling companies in the short term but they may exacerbate problems for some businesses as the need to repay debt catches up with them later in the year.

“Experience of the last four recessions tells us that unemployment levels and corporate and personal insolvencies have lagged behind technical recession by 1 to 2 years. With tax and interest rates certain to rise, as well as increasing pressure on consumer spending, there is every reason to suggest that the insolvency peaks of this recession remain some way off.

“While business finance is expected to become more readily available during the first half of 2010, we anticipate a rise in the levels of financial distress during the second half of 2010, as temporary financial support measures are unwound.”

Q4 09 release tables
Significant problems by Region

Year on Year Quarter on Quarter
Region Q4 2008 Q4 2009 Percentage change Q3 2009 Q4 2009 Percentage change
Scotland 8,497 8,630 2% 7,637 8,630 13%
North East & Yorkshire 13,672 12,253 -10% 12,135 12,253 1%
North West & North Wales 18,646 15,880 -15% 15,509 15,880 2%
East Midlands 8,850 7,774 -12% 7,643 7,774 2%
West Midlands 13,611 12,628 -7% 11,292 12,628 12%
South East & East Anglia 74,930 61,805 -18% 56,991 61,805 8%
South West & South Wales 20,832 18,517 -11% 18,135 18,517 2%
All Regions 159,038 137,487 -14% 129,342 137,487 6%
Critical problems by Region

Year on Year Quarter on Quarter
Region Q4 2008 Q4 2009 Percentage change Q3 2009 Q4 2009 Percentage change
Scotland 127 179 41% 164 179 9%
North East & Yorkshire 458 359 -22% 394 359 -9%
North West & North Wales 606 494 -18% 602 494 -18%
East Midlands 248 239 -4% 228 239 5%
West Midlands 401 342 -15% 376 342 9%
South East & East Anglia 2,108 1,827 -13% 1,811 1,827 1%
South West & South Wales 661 600 -9% 597 600 1%
All Regions 4,609 4,040 -12% 4,172 4,040 -3%
Significant problems by Sector

Year on Year Quarter on Quarter
Region Q4 2008 Q4 2009 Percentage change Q3 2009 Q4 2009 Percentage change
Automotive 4,171 3,905 -6% 3,830 3,905 2%
Construction 17,920 16,794 -6% 17,098 16,794 -2%
Engineering 2,114 1,839 -13% 1,741 1,839 6%
Manufacturing 6,968 5,885 -16% 5,615 5,885 5%
Retail 10,929 9,987 -9% 9,510 9,987 5%
Services 49,738 44,517 -10% 36,345 44,517 22%
Transport & Communications 6,082 5,264 -13% 5,050 5,264 4%
Critical problems by Sector

Year on Year Quarter on Quarter
Region Q4 2008 Q4 2009 Percentage change Q3 2009 Q4 2009 Percentage change
Automotive 97 116 20% 92 116 26%
Construction 1,103 942 -15% 991 942 -5%
Engineering 90 95 6% 127 95 -25%
Manufacturing 276 226 -18% 242 226 -7%
Retail 270 212 -21% 310 212 -32%
Services 1,019 958 -6% 938 958 2%
Transport & Communications 246 185 -25 181 185 2%

Red Flag Alert

Red Flag Alert measures corporate distress signals through a comprehensive and complex methodology, drawing on factual legal and financial data from a wide range of relevant sources for companies that have been trading for over a year.

The survey monitors the numbers of companies experiencing difficulties in two categories: "Significant Problems" and "Critical Problems".

Companies with "Significant Problems" are those with either a court action and/or average, poor, very poor insolvent or out date accounts.

Companies with "Critical Problems" are those with CCJs totalling £5,000 or more and/or Wind-Up Petition related actions.

Since November 2009, Red Flag Alert has been 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.

www.redflagalert.com

About Begbies Traynor Group

Begbies Traynor Group plc is a specialist professional services organisation providing independent professional advice and solutions to businesses, financial institutions, the accountancy professions and individuals in the areas of corporate finance, recovery, investigation, risk management, commercial finance and specialist tax advice. It is listed on AIM.