Begbies Regulatory News (BEG)

Begbies Traynor plc 19 Oct 2012

A divided nation

Zombie SMEs stagnating natural UK recovery cycle

Latest Red Flag Alert Report for Q3 2012

The most recent Begbies Traynor Red Flag Alert research, published today (19 October), which monitors the financial health of "Corporate UK", shows a starkly divided nation with marked increases in financial distress amongst businesses based in the North and SMEs, whilst Southern based and larger businesses have shown marked improvements in financial health. The quarter on quarter increase in 'Significant' distress levels amongst SMEs (up 10.5%) also indicates the growing impact of zombie businesses - those companies who are in debt and are only just generating sufficient cash to survive - and the choking effect they are having on the natural UK recovery cycle.

North South divide

Relatively stable levels of 'Combined' distress across the UK (categorised as companies experiencing 'Significant' or 'Critical' financial problems), up just 1% in Q3 2012 compared to Q2 2012, mask a clear divide in fortunes between companies in the North compared to the South. While Southern businesses (those based in London, the South East and the South West) witnessed a 7% decrease in 'Combined' distress levels in Q3 to 103,096 (Q2 2012: 111,206), businesses across the rest of the UK experienced a 9% increase in 'Combined' distress to 120,029 (Q2 2012: 110,137).

In the South, the improvement in corporate health has been driven primarily by an 18% reduction in 'Combined' distress amongst London based businesses and a strong recovery in the financial services sector (down 33% compared to Q2 2012), media (down 27%) and the consumer facing sectors including bars & restaurants (down 31%), general retailing (down 26%), leisure & culture (down 31%) and sports & recreation (down 26%).

The deterioration in the financial health of businesses throughout the rest of the UK was driven by particularly marked increases in 'Combined' distress in the East of England (up 13%), the North West (up 12%), Scotland (up 12%), Yorkshire (up 8%) and the Midlands (up 8%) and in the construction and real estate sectors (up 34% and 135% respectively) and the industrial sectors (transport & logistics up 71%, manufacturing up 28% and print & packaging up 58%).

Ric Traynor, Executive Chairman of Begbies Traynor Group, commented: "These figures demonstrate a clear North/South divide in the UK, with the international nature of the London economy, combined with higher employment levels in the South and therefore slowly improving consumer confidence, supporting strong improvements across the important financial services and media industries as well as the key consumer facing sectors. However, the 9% increase in businesses experiencing 'Combined' distress across the rest of the UK is indicative of the challenges facing the Government in re-balancing the economy by developing growth industries beyond financial services and reducing the inequality that exists between the regions."

A twin track economy with SMEs in the slow lane

Across the UK, companies experiencing 'Critical' distress (the most severe risk level) were down 17% to 4,107 (Q2 2012: 4,947) compared to the previous three months, indicating a marked reduction in the number of companies with a high propensity to fall into insolvency in the next quarter. However, this fall in critical distress does not represent an improving picture of corporate health overall.

Actions measured within the 'Critical' problems category - such as the issuing of CCJ's and winding up petitions - are typically at their lowest during Q3 due to seasonal factors including Court holidays. This has been exacerbated by both creditor forbearance and the fact that the majority of businesses, by instigating tougher credit control procedures and avoiding transacting with companies with poor credit scores and payment records, have reduced their need to resort to Court actions to recover unpaid bills.

However, companies in our 'Significant' problems category are an earlier stage indicator of the trend in the financial health of "Corporate UK" and these show a wide divergence in the health of SMEs compared to larger companies. Within this category, there has been a 10.5% increase in SMEs exhibiting signs of earlier stage distress to 208,067 (Q2 2012: 188,265) compared to a 61% decrease in large companies to 10,951 (Q2 2012: 28,123).

The increase in SMEs experiencing distress has been driven primarily by marked increases in specific sectors including; construction and real estate (up 41% and 148% respectively), transport & logistics (up 70%), print & packaging (up 52%) and hotels (up 66%). The regions showing the greatest increases in 'Significant' distress amongst SMEs include Scotland (up 22%), East of England (up 20%) and the North West (up 20%). This increase may also reflect the considerable increase in the number of newly incorporated companies registered in the 2011/12 year, many of which have been formed by individuals pushed into starting their own businesses due to unemployment but, unaware of the risks involved in starting a new business, many are unfortunately already showing 'Significant' financial distress.

Julie Palmer, Partner at Begbies Traynor, commented: "These figures demonstrate that an increasing number of SMEs are bearing the brunt of the current challenging credit and trading conditions. It is evident that larger businesses are exploiting their scale by enforcing lengthier payment terms on SME's. This, together with the disproportionate impact of higher energy prices and the limited availability of funding support, is combining to form a perfect storm for the UK's SME sector."

Julie Palmer continued: "Unfortunately the outlook for many of these SME's is poor. These zombie companies are only just generating sufficient cash to pay the interest on their debts and keep creditors at bay. Whilst many of these SMEs may survive with the benefit of low interest rates and creditor forbearance, they are in no position to deal with unexpected costs, lost orders or bad debts or to fund increases in working capital and invest in growth. At a time when the hopes for a UK recovery are pinned on the private sector delivering growth and investment, it is clear that the Government needs to act quickly to ensure that credit conditions for SMEs are improved or risk choking off a recovery before it really gets started."

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Notes to editors:

About Begbies Traynor Group

Begbies Traynor Group plc is a specialist professional services consultancy providing independent professional advice and solutions to businesses, financial institutions, the accountancy and legal professions and individuals in the areas of recovery, corporate finance, investigations and risk management. It is listed on AIM (Ticker: BEG). Further information can be found at: www.begbies-traynorgroup.com

About 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 minor CCJs (of less than £5k) 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. Companies with 'Critical' problems are those with CCJs totalling over £5,000 within a three month period or winding-up petitions against them or which have entered Corporate Voluntary Arrangements.

'Combined' problems provide an overall picture of business distress and represent an aggregation of 'Significant'and 'Critical' problems

Following in-depth research and substantial development of Red Flag Alert the latest statistics now produced by the system cover a broader range of stress indicators and provide a much stronger indication of the propensity to fail, amongst the UK's corporate community. Our research has shown that a wider range of aspects of a company's trading history can be utilised in determining their likely decline and need to be included in the measurement of 'Significant' corporate stress across all regions and industry sectors. This change to the screening for 'Significant' problems means that we are unable to provide prior year comparatives at this time (and until we have collated a year's data under the new system).

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

For further information contact:

MHP Communications

Katie Hunt / Jade Neal 0203 128 8100

Begbiescorporate@mhpc.com 

'Combined' problems broken down by South and the Rest of the UK

* Total includes 3,029 companies in Q3 2012 which were uncoded and, therefore, could not be categorised within a given region (Q2 2012: 3,302)

'Combined' problems broken down by individual regions:

'Significant' problems broken down by Large and SME**:

**SMEs are defined as having less than 250 employees

'Critical' problems by region and by sector: