Companies in the UK are experiencing increased levels of financial distress according to a recent survey. The second quarter 2010 Red Flag Alert Statistics released by business rescue specialist Begbies Traynor showed that £69.5 billion of liabilities in the UK are at risk of default. This is up 26 percent from the first quarter figure of £55 billion.
Moreover, the average debts of troubled companies have jumped by 60 percent to £545,000 in the second quarter from £340,000 in the prior three-month period.
The one ray of sunshine in the report that was released at the end of last week was that the actual number of companies that are in financial disarray fell by 21 percent from the first quarter.
The research therefore suggests that a weak and trepid economic recovery is largely accruing to larger companies, as the weak get weaker and the strong get stronger; fewer companies are facing greater levels of distress.
This situation is likely to continue as the level of credit now available for corporate UK is at its lowest level since the end of 2008. According to the Bank of England's Credit Conditions survey, only 6.5 percent of lenders expect more credit to be available in the third quarter of this year than in the second quarter. This is the lowest level for five quarters, which had all predicted credit availability increases in the 20 percent to 29 percent range.
According to Ric Traynor, Executive Chairman of Begbies Traynor, further distress looms, due to cuts in government spending and in more assiduous tax collection. Traynor believes that some 52,000 companies in the IT, recruitment, advertising and business services sectors will face increased levels of distress due to reductions in government spending, the so-called austerity measures. Moreover HMRC, the UK tax collection agency, is being less forgiving in applications for tax deferrals, the so-called Business Support Scheme or "Time to Pay" as it is nicknamed.
"We are concerned that the levels of business distress will increase again, potentially from the first half of 2011, once the full effects of the coalition government's fiscal tightening measures impact the economy and particularly amongst those private sector businesses most dependant on public sector contracts," says Traynor.
Of course, Traynor clearly has a vested interest in highlighting corporate distress, given its role as a recovery expert. But the statistics do point to a trend that has been apparent for some time.
Large, well capitalized companies are doing well in this recession. Although banks are flush with corporate deposits, credit is only available to large entities. Smaller companies are hurting. Those that rely on credit for working capital are battered while those that depend on government outsourcing contracts are likely to be bust.
CFOs at such companies could face the spiral of decline as their debts mount and revenues fall. At which point, it would be time to call in the recovery specialist such as Begbies Traynor.