Nearly 50,000 companies face collapse as 'debt storm' hits

[Leroy N. Soetoro]

https://finance.yahoo.com/news/nearly-50-000-companies-face-181828021.html

Tens of thousands of businesses are on the brink of collapse as higher
borrowing costs and taxes pile pressure on the economy.

Nearly 50,000 companies are on the edge of failure as they grapple with a
“double whammy” of steeper interest rates and consumer gloom, new figures
from a leading insolvency practice show.

Hikes to corporation tax and the National Living Wage are also adding to
costs for debt-laden businesses.

Begbies Traynor’s Red Flag Alert warned that 47,477 companies were in
“critical” financial distress at the end of 2023, an increase of 10,000
since September.

The 26pc surge from the third quarter is the second consecutive period
where critical financial distress has grown by more than a quarter.

Many companies on the list are expected to go bust, leaving workers
unemployed and creditors out of pocket.

Begbies Traynor partner Julie Palmer said: “Any company which is consumer
facing is feeling the effects of the cost of living crisis and the days of
cheap money are over.

“Consumer confidence is very low and they’re having to pay more for their
debt. It’s going to be a hard year. It’s a double whammy.”

Companies who borrowed to stay afloat during Covid are also having to
repay their bounceback loans, compounding to the financial distress, Ms
Palmer said.

The Bank of England base rate interest rates of 5.25pc have increased the
cost of servicing debts taken out when borrowing costs were at historic
lows.

The Bank of England began raising interest rates in 2021 from an historic
low of 0.1pc and rates have hit a 16 year high.

Inga West, a restructuring lawyer at Ashurst, said it was unsurprising
businesses were feeling the stress.

She said: “For smaller businesses, this could mean the end of the road.

“Larger businesses often have a few more options open to them. But with
interest rates set to remain fairly high for a while, making it difficult
for a business to borrow its way out of trouble, they are likely to need
both operational as well as financial restructurings.”

All of the 22 sectors tracked by Begbies showed an increase in critical
financial distress, with construction and real estate sectors the hardest
hit.

London and the south east are bearing the brunt of the problems, with more
than 22,000 companies in a critical condition at the year end.

The Midlands is the next worst region with around 6,000 facing distress
and around 5,000 in the north west.

Between 17,000 and 25,000 companies enter insolvency every year on
average, meaning the UK could see a doubling in the number of insolvencies
if all “critical” firms go under.

In addition to companies dubbed “critical”, Begbies said 539,900 UK
businesses were now in ‘significant’ financial distress, 13pc higher than
last quarter.

A series of rate cuts may provide some much needed relief for under-fire
firms.

Money markets are predicting about a 60pc chance that policymakers will
begin cutting interest rates in May, with a first cut priced-in by June at
the latest.

The market expects at least four cuts of a quarter of a percentage point
this year as economists predict inflation could fall below the Bank of
England’s 2pc target by April.

Ms Palmer said some of the rate pressure may ease but the environment was
likely to stay. “Interest rates are unlikely to gallop any further and
will likely come down if anything,” she said.

There are no clear figures on how much debt UK corporates have taken but
the Bank of England has warned of a £1.8 trillion credit market which
developed in the low rate environment.

Businesses are also facing higher burdens on their costs from government
policy. Chancellor Jeremy Hunt unveiled plans to hike the minimum wage by
£1 an hour to £11.44 from April while corporation tax has also been hiked
to 25pc from 19pc.

Companies like Currys have blamed such policies for loading costs onto
“overburdened” retailers.


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