Corporate distress caused by inflation and rising interest rates is set to spread from smaller to larger UK companies, according to recovery specialists Begbies Traynor and FRP Advisory.
Ric Traynor, executive chair of Begbies Traynor, said smaller businesses had so far dominated rising levels of insolvencies and driven the number of liquidations above pre-pandemic levels.
The head of the Aim-traded group predicted that the number of administrations, which he said typically involved bigger companies, was likely to pass the same threshold “towards the end of this calendar year”.
Types of company insolvency procedures include creditors’ voluntary liquidations and administrations. The latter process was designed to save the business through restructuring or sale to a third party, Traynor said, adding that banks were generally involved “for a significant amount of money”, usually secured on the assets.
The number of company insolvencies rose after seasonal adjustment to 5,747 in the first quarter of this year, an 18 per cent increase compared with the same period last year, according to government data. Insolvencies declined 4 per cent, however, compared with the fourth quarter of 2022.
Meanwhile, administrations increased 16 per cent to 318 during the first quarter, compared with the same period last year. This marked a 12 per cent drop from the fourth quarter of 2022.
Despite this, Traynor said: “We expect to remain busy for the next few years at heightened levels of insolvencies as a result of what happened in the pandemic, Brexit, inflation [and] interest rates.”
Construction was “always the biggest sector in terms of insolvencies” with the industry often operating on “very fine” profit margins that were affected by rising interest rates and inflation, Traynor said. Small, independent subcontractors suffered first because of a slowdown in payments during contractions, he added.
Traynor predicted that hospitality and retail companies would also continue to produce insolvencies and were particularly vulnerable as a result of inflation pushing up costs and declining consumer spending.
Begbies Traynor has this year been appointed as administrator to companies including stationery retailer Paperchase, Covid-19 test provider Circular 1 Health, fair trade organisation Traidcraft and cashless payment provider Tappit Technologies. Traynor said the group generally dealt with cases involving companies with assets of between £1mn and £50mn.
The group said in a year-end trading update last week that it expected to post an 11 per cent increase in revenue, reaching close to £122mn for its financial year ended April 30, up from £110mn a year ago. Organic growth was about 6 per cent in its business recovery activities.
Fellow corporate restructuring specialist FRP Advisory also predicted, in a full-year trading update published this month, that the administration market “should experience greater volumes” during the 2024 financial year. It similarly cited economic headwinds such as rising interest rates, input-cost inflation, supply chain disruptions, Brexit and the withdrawal of pandemic support measures.
FRP Advisory said it experienced “encouraging” levels of activity in this market during the fourth quarter of its 2023 financial year. The group expected to report revenues of £104mn for the full year to April 30, up 9 per cent from last year.
Source: Financial Times