Toxic debt held by 52% of all companies as amounts owed increased by £ 1.9bn in 2020
Tax returns filed so far for 2020 reveal 52% of businesses would struggle to pay their bills in the next 12 months (liquidity ratio less than 1)
Corporate debt rose by £ 1.9bn in 2020, significantly more than the £ 306bn revealed in 2019 returns
Begbies Traynor expects the percentage of ‘toxic’ debt to rise and more zombie businesses to be created with a real risk that creditors will recall debts from September
New data from the Begbies Traynor group revealed that UK corporate debt climbed from £ 1.9bn in 2020 to £ 6.6bn, and 52% of UK businesses are now grappling with ‘debt toxic ”which may never be reimbursed.
The analysis of 3 million tax returns by the restructuring and insolvency specialist revealed that the 2020 accounts show 1.2 million companies with a liquidity ratio of less than 1 *. He also revealed that corporate debt soared from £ 1.9bn to £ 6.6bn last year as the coronavirus devastated UK businesses.
Begbies Traynor expects the repercussions of these “toxic debts” to be exacerbated by many creditors who call them from September, when courts reopen and they can pursue payments they have been missing for a long time. period.
Brendan Clarkson, Director of National Creditors Services at Begbies Traynor, said:
“Toxic debt is being swept away by UK businesses and there is a real danger that government loans to help businesses get through this period will never be repaid. As a result, there will likely be a rush from September, for that to happen. creditors demand payments After all, the longer they have no payment, the more likely they are to turn into “zombie” companies riddled with debt and trying to collect revenue to pay off that debt.
“Zombie companies that owe these creditors money have been a problem since the recession over a decade ago, taking advantage of cheap debt available from a number of new lenders in the market. In the last 20 months or so, there have been around 30 new lenders entering the market eager to help, but as debt continues to rise, government deferrals have continued to hurt.
“We are now at a point where many companies will not be able to pay their debts over the next 12 months. It is a difficult position, but it is a position that we must prepare for and find the best. result. We can’t we just have a cliff of insolvencies starting in September. We need to scale the damage so that the economy and the courts can handle the high levels of pressure. ”
The data also revealed that some sectors are in a more vulnerable position than others. Two-thirds (67%) of real estate and real estate companies (66%) of hotels and accommodation and (65%) of bars and restaurants are now unable to pay their debts common.
Real estate and property have also increased their debt by £ 38 billion in the past year – one of the highest increases among the 22 sectors analyzed. Only support services (1.1 billion) and industrial transport and logistics (39 billion pounds sterling) were higher.
It is no coincidence that these sectors have also seen a sharp increase in the number of financially troubled companies according to the latest Red Flag alert data from Begbies Traynor. In the 12 months leading up to the first quarter of 2021, financially struggling real estate and real estate activities grew by 51%, hotels and accommodation by 39%, and bars and restaurants by 30%.
Julie Palmer, Partner at Begbies Traynor, said:
“The high percentage of companies with toxic debt in all sectors and the increase in UK corporate debt is alarming. The fact that the EBITDA of all UK companies stands at £ 300 billion is encouraging , but that is not enough to counter the huge debts of the companies loaded on the back at this time.
“Being able to wipe out a few zombie companies from the landscape at a time is sustainable and can have the positive effect of allowing other healthier, more successful companies to suck up the businesses they have. The remaining viable businesses have growth potential. and job creation, and while it is never nice to see a business go bankrupt, it can sometimes have a positive benefit in the longer term. recirculate the working capital of a failing zombie business.
“UK plc is at a crossroads, but there are strong and talented companies in the bunch that are chomping on their debt and getting stronger. Most of the companies we analyzed had a liquidity ratio above 1.5, meaning they were in a good position to thrive after that. They can own the debt they have, and they can suck the wealth out of the opportunities that zombie companies leave behind.
“The creditors of these companies will benefit and be able to provide more finance to support growth, but we need to make sure that the lenders are in a good position to repay their creditors. , then strengthen the UK companies which have the best chance of surviving and thriving in the years to come. ”