Business distress levels on the up

Businesses in the North West have seen an increase in the level of distress in the final quarter of 2016.

Around 27,360 companies experienced significant problems, a rise of 11% on the previous quarter in line with the national average.

However, the Red Flag Alert for Q4 2016 compiled by listed business recovery practice Begbies Traynor said construction companies were showing increased signs of resilience with a 2% fall in significant business distress compared to the same period in 2015 but an increase of 8% compared to the previous quarter.

Bars and restaurants are also experiencing reduced levels of distress with only a 5% increase in distress quarter on quarter, and no change from the previous year.
 
Sectors that fared less well were industrial and transportation (17% increase) and financial services (13%) possibly suffering from the uncertainty following the Brexit vote last June.

Manchester seemed to fair even better with only a slight increase in significant distress of 2% year on year, and 10% quarter on quarter, which highlights the strength and resilience of the city and the level of investment that is being injected.

In terms of critical distress, the more advanced signs of financial problems, the North West has seen a 6% increase quarter on quarter, which is in line with the national picture for the UK as a whole.

Year-on-year critical distress increased by 2% compared to a fall nationally of 11%.
 
Gary Lee, partner in the Manchester office of Begbies Traynor, said: “There is a feeling of optimism within the North West and particularly in Manchester which follows significant investment in new office space, and bars and restaurants.

“There is a buzz in the city centre which is reflected in the numbers that show that Manchester is bucking the trend.

“However, a level of caution still needs to be exercised as we have still to experience the real impact of Brexit and adjust to whatever deal is eventually negotiated. A falling pound and rising inflation will bring their own challenges and companies and business owners must be flexible to adapt to the many different scenarios that 2017 may bring.

“Those companies that take action well in advance of any change in circumstances will be best placed to take advantage of new opportunities and emerging markets, especially if we go back to basics and start manufacturing again.”

Throughout the whole of 2016,  the level of business insolvencies remained at pre-crisis levels during although an increase in the final quarter was the first in five years, according to statistics from the Insolvency Service also released today.
 
While insolvencies are now lower than before the financial crisis, 2017 could be more challenging, said Richard Wolff, the North West chair of the insolvency and restructuring trade body R3.

The 2016 figures were skewed by the inclusion of almost 1,800 interconnected companies but excluding these, they show that there were 14,706 company insolvencies in 2016, broadly unchanged from the year before.

Wolff, who is also head of corporate recovery and Insolvency at law firm JMW, said: “Despite a number of challenges for businesses in 2016 – the fall in the value of the pound since June’s EU referendum and the introduction of the National Living Wage among them – there is still a lot of downward pressure on corporate insolvency numbers.

“Businesses are enjoying a significant safety net: patient creditors, record low borrowing costs and an increased focus by the insolvency and restructuring profession on early intervention. R3’s regular surveys of business distress have found that key signs of business distress are near their record lows.

“The fall in the value of the pound since the summer will undoubtedly have been a shock to some smaller businesses though – almost half our members have said Brexit has come up in discussion with struggling businesses since June.

“After half a decade of falling insolvencies, insolvency levels are lower now than they were even before the financial crisis. However, the decline now seems to have stalled and we’ve had the first increase in insolvencies since 2011.

“2017 will be an important test: many larger firms will have been protected from the pound’s fall by currency hedges or long-term fixed-price contracts, but these will unwind or end this year. Businesses have been buoyed by resilient consumer spending since the EU referendum but much of this is on the back of increased borrowing – it’s not clear how sustainable this will be.”

The figures show the number of individuals becoming insolvent rose in 2016, but remained at its second lowest level in 11 years. During the year, 90,930 entered an insolvency procedure, up by 13% on 2015.

Wolff said this was because of easier access to personal insolvency procedures.

He added: “It’s not necessarily that more people have needed a personal insolvency procedure, but that more people are able to enter a debt solution appropriate to their situation.”