Default risk rises for large UK companies as inflation bites

Featured Sponsor

Store	Link	Sample Product
UK Artful Impressions	Premiere Etsy Store

The corporate distress caused by inflation and rising interest rates is set to spread from the smallest to the largest UK companies, according to recovery specialists Begbies Traynor and FRP Advisory.

Ric Traynor, executive chairman of Begbies Traynor, said small businesses have so far dominated the growing levels of delinquencies and brought the number of liquidations above pre-pandemic levels.

The head of the Aim-traded group predicted that the number of administrations, which he says typically involve larger firms, was likely to cross the same threshold “towards the end of this calendar year”.

The types of corporate insolvency proceedings include voluntary liquidations of creditors and administrations. The latter process was designed to bail out the company through restructuring or sale to a third party, Traynor said, adding that banks were typically involved “for a substantial amount of money,” usually secured on assets.

The number of business insolvencies after seasonal adjustment rose to 5,747 in the first quarter of this year, an 18% increase over the same period last year, according to government data. Delinquencies were down 4%, however, compared to the fourth quarter of 2022.

Meanwhile, administrations increased 16% to 318 during the first quarter, compared to the same period last year. This marked a 12% decline from the fourth quarter of 2022.

Despite this, Traynor said: “We expect to remain committed for the next few years to high levels of defaults as a result of what has happened during the pandemic, Brexit, inflation [and] interest rates.”

Construction was “always the largest sector in terms of delinquencies” with the industry often operating on “very thin” profit margins impacted by rising interest rates and inflation, Traynor said. Small independent subcontractors suffered first from slower payments during the contraction, she added.

Traynor predicted that hospitality and retail companies will also continue to experience insolvencies and will be particularly vulnerable as inflation costs rise and consumer spending falls.

Begbies Traynor was named a director this year for companies including stationery retailer Paperchase, Covid-19 testing provider Circular 1 Health, fair trade organization Traidcraft and cashless payments provider Tappit Technologies . Traynor said the group has typically dealt with cases involving companies with assets between £1m and £50m.

The group said in a year-end trading update last week that it expects to see an 11% increase in revenue to nearly £122m for the financial year ended April 30, up from £110m in one year ago. Organic growth was approximately 6% across its corporate recovery businesses.

Fellow corporate restructuring specialist FRP Advisory also predicted, in a full-year trading update released this month, that the administrative market “is expected to experience higher volumes” during the 2024 financial year. It similarly cited economic headwinds such as interest rate hikes, input cost inflation, supply chain disruptions, Brexit and the withdrawal of pandemic relief measures.

FRP Advisory said it reported “encouraging” levels of activity in this market during the fourth quarter of its 2023 financial year. The group expected to post £104 million in revenue for the full year to 30 April, an increase by 9% over last year.