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The number of UK companies in significant financial distress is rising as government support is withdrawn from beleaguered businesses, according to business advisory firm Begbies Traynor. 

Begbies Traynor’s Red Flag Alert for the fourth quarter of 2021 showed a total of 589,168 businesses across the UK are reporting significant financial distress, a 5% rise on the previous three months 

It said the situation even worse for companies already teetering on the brink of failure, with critical financial distress up 7% year-on-year in the final three months of 2021 

It also reports a 106% rise in County Court Judgments (CCJs) – which is a key early sign of future insolvencies as creditors are now actively using courts to recover debts 

The report “now paints a particularly worrying picture for UK businesses” with increasing numbers falling victim to pressures which it says have been building since coronavirus began piling up problems in the economy almost two years ago. 

Pressure ratcheting up almost across the UK corporate landscape, with only one sector of the 22 covered by the research showing an improved position 

‘Support services’ was identified as the most distressed sector, with general retail in sixth and bars and retail tenth. 

Julie Palmer, partner at Begbies Traynor, said: “Businesses that have bravely battled through the pandemic could now start to fail as the pressures they face become too much. 

“Support from the Government such as furlough payments, tax reliefs and a moratorium on landlords being able to evict businesses due to rent arrears cannot go on forever. 

“Without these measures in place to protect them, a rising number of companies will have no other option but to relinquish their business after two years of struggling on in the economic uncertainty that has been tempered by measures to combat the impact of coronavirus. 

“The lag effect of the economic fallout from Covid, plus significantly higher inflation, has created a perfect economic storm for many companies, particularly the UK’s SME sector, which will undoubtedly drive insolvency rates even higher.” 

She said inflation is now the greatest threat to the economy with the true rate potentially running far beyond the official 5.4% rate and possibly many multiples more than the Bank of England’s target of 2%.  

Rising wage, energy and materials costs mean the CPI figures are showing only part of the story in the UK and the subsequent impact on the public’s disposable income is expected to be far greater. 

She continued: “The construction sector looks particularly vulnerable as raw material availability, combined with record inflation, has significantly reduced the margins for many SMEs. We are also seeing evidence of over-trading within construction as the sector’s boom post-lockdown has caused real cashflow issues that are now impacting on businesses.” 

Ric Traynor, executive chairman of Begbies Traynor Group, commented: “The growth in significant financial distress is very concerning and provides further evidence of the pressure the current economic backdrop is placing on UK businesses. With nearly all sectors experiencing a deterioration of their financial position since the last quarter, the ongoing supply chain issues and a 30-year record for inflation are less than ideal for companies that have already been hard hit by the pandemic. 

“This new data, combined with the recently published Government insolvency statistics which highlighted a 33% rise in corporate insolvencies in December 2021 vs December 2019 demonstrates that 2022 is going to be very difficult for many SMEs. 

“Ultimately, these market dynamics, on top of the withdrawal of government support measures and protection, is likely to lead to a rapid acceleration in insolvency rates over the course of 2022 and beyond.” 

Morning update 

Food, drink and fragrance ingrediant manufacturer Treatt has continued to grow in the three months to 31 December. 

Ahead of its AGM this morning, Treatt said it has made a “good” start to the new financial year since 30 September 2021, with the order book up strongly year-on-year.  

As previously indicated, against the backdrop of last year’s unusually strong first half, it expects this year’s profit before tax and exceptional items to revert to a more normal second half weighting, reflecting the seasonality of beverage consumption in the Northern Hemisphere. 

The business continues to grow across multiple categories reflecting its increased investment in R&D and relevance with prevalent consumer beverage trends, particularly the growing demand for healthier, natural products. 

It added that its move to the new UK headquarters is “progressing as planned” and will provide substantial extra capacity in coming years to grow with enhanced efficiency and an emphasis on sustainability. 

“The board therefore looks forward to the remainder of this financial year and beyond with confidence,” it stated. 

On the markets this morning, the FTSE 100 is back down 0.6% to 7,506.7pts.

Risers include AG Barrm up 1.8% to 507p, Virgin Wines, up 1.8% to 202p and Tesco, up 0.8% to 302.3p.

Fallers include Fever-Tree, down 4.3% to 2,066.8p, Ocado, down 4% to 1,497p and Associated British Foods, down 3.4% to 1,948.5p.

Yesterday in the City 

The FTSE 100 was up another 1.1% yesterday to 7,554.3pts on its third successive day of gains following Monday’s falls. 

Fever-Tree fell back 8.5% to 2,159p after despite posting strong 2020 sales as it warned costs were running ahead of previous expectations. 

Other fallers included Deliveroo, down 3.3% to 152p, Parsley Box, down 3% to 32p, Hilton Food Group, down 2.1% to 1,016p, Premier Foods, down 1.9% to 114.4p and Nichols, down 0.7% to 1,340p. 

Britvic and Diageo rose 2.5% to 887.5p and 2.5% to 3,735.5p respectively after updating the market on strong top-line performance yesterday. 

Other risers included THG, up 4.8% to 136.1p, PZ Cussons, up 3.5% to 194p, Ocado, up 3.4% to 1,560p, DS Smith, up 3.1%, Tate & Lyle, up 2.4% to 732p, PayPoint, up 2.4% to 674p and WH Smith, up 2.4% to 1,708.5p. 

Tesco and Sainsbury’s were up 1.4% to 300p and 1.5% to 296p respectively.