More financial woes in second half of 2010, warns Begbies

THE number of North West firms reporting ‘critical’ problems has fallen by 18% on the previous year, according to insolvency specialist Begbies Traynor.

Its Red Flag Alert also found that the number of companies in the region with CCJs totalling at least £5,000 or wind-up petitions stood at 494 in the fourth quarter of 2009.

The number of companies reporting ‘significant’ problems – defined as either a court action and/or average, poor, insolvent or out date accounts – fell 15% on the previous year to 15,880 for the fourth quarter of 2009. However, they also increased 2% on the previous quarter.

Across the UK, more than 140,000 companies experienced either significant or critical financial problems in the final quarter of 2009; 6% higher than the previous quarter but 14% lower than the same period in 2008.

According to Manchester-based Begbies, a new trend is emerging, which indicates that a higher number of business failures are occurring at an earlier stage of deterioration than in previous recessions.

Although it does also point to improved business confidence compared to a year earlier, it also fears that when HMRC’s ‘time-to-pay’ scheme is finished there will be a significant rise in company failures – most probably from Q3 2010 onwards.

Gary Lee, partner at Begbies Traynor in Manchester said: “The number of significant and critical problems for the fourth quarter of 2009 is down compared to the fourth quarter of 2008 which is to be expected as business confidence returned to the region in 2009.

“A good set of trading results for retailers and bars and restaurants in the run up to Christmas has helped keep the local economy buoyant.

“However, the numbers are still worse than in the fourth quarter of 2007 which shows that there is still along way to go before we return to the robust trading position before the economic downturn began.

“It will be interesting to see what 2010 results reveal as we head towards a general election in the second quarter of 2010 and whether the economy has artificially been kept alive, with a period of financial austerity lurking just around the corner.”

Begbies Traynor’s analysis by sector showed that nationally the automotive sector saw the largest quarter on quarter increase in critical actions – up 26% on the third quarter of 2009 – as well as one of the highest year on year rises – up 20% on the fourth quarter of 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 the fourth quarter of 2009 compared to the third quarter of 2009.
 
The retail sector saw a significant improvement with a 32% decline in critical actions, compared to the third quarter of 2009, or a 21% decline on the fourth quarter of 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. 

Although the construction sector witnessed an improvement in significant and critical actions compared to the fourth quarter of 2008, it remains particularly vulnerable as it has benefited 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.

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 one to two 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.”

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.