Tax returns filed so far for 2020 reveal 52% of companies would struggle to pay their bills in the next 12 months (liquidity ratio less than 1)
Corporate debt grew by £1.9tn in 2020, significantly higher than the £306bn revealed in 2019 returns
Begbies Traynor expects percentage of 'toxic' debts to increase and more zombie companies to be created with a real risk that creditors will call in debts from September
New data from Begbies Traynor Group has found that UK corporate debt soared by £1.9tn in 2020 to £6.6tn, and 52% of UK businesses are now saddled with 'toxic debt' that may never be repaid.
The analysis of 3 million tax returns by the restructuring and insolvency specialist, discovered that 2020 accounts show 1.2 million businesses with a liquidity ratio lower than 1*. It also found that corporate debt soared by £1.9tn to £6.6tn last year as coronavirus devastated UK business.
Begbies Traynor is expecting that the repercussions of these of 'toxic debts' will be exacerbated by many creditors calling them in from September when courts reopen and they can chase payments they have missed for a lengthy period of time.
Brendan Clarkson, Director of National Creditor Services at Begbies Traynor, said:
"Toxic debt is being washed around UK business and there is a real danger that the loans from government to help businesses through this time will never be repaid. As a result, there is likely to be a scramble from September, for creditors to seek payments from lendees. After all the longer they do not have payment, the longer they themselves are at risk of transforming into 'zombie' businesses racked with debt and trying to gather income to service that debt.
"The zombie companies that owe money to these creditors have been an issue since the recession more than a decade ago, taking advantage of cheap debt available from a number of new lenders to the market. In the last 20 months or so there have been around 30 new lenders enter the market, eager to help, but while debt keeps growing, government reprieves on payment have continued to hurt.
"We are now at a stage where many companies will not be able to pay their debts for the next 12 months. It's a harrowing position, but it is one that we have to prepare for and find the best outcome of. We can't simply have a cliff-edge of insolvencies from September. We need to stagger 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 businesses in Real Estate and Property, (66%) Hotels and Accommodation and (65%) Bars and Restaurants are now unlikely to be able to pay their current liabilities.
Real Estate and Property also increased its debt pile by £38bn in the last year - one of the highest increases across the 22 sectors analysed. Only support services (1.1tn) and industrial transportation and logistics (£39bn) were higher.
It is no coincidence that these sectors also experienced large increases in numbers of businesses in significant financial distress by the latest Red Flag Alert data from Begbies Traynor. In the 12 months leading to Q1 2021, Real Estate and Property businesses in significant financial distress increased 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 across sectors and the rising debt of corporate UK is alarming. The fact that EBITDA of all UK businesses stands at £300bn is encouraging, but it isn't enough to counteract the huge debts that companies have loaded on their backs at this time.
"Being able to clear a few zombie companies from the landscape at a time is sustainable and can have the positive effect of allowing other, healthier and more prosperous companies to hoover up the business they hold. The viable businesses left over have the potential for growth and job creation, and even though it is never pleasant to see a company go under, sometimes it can have a positive, longer-term benefit. Well-funded businesses are, of course, better placed to pick up market share and able to better recirculate the working capital from a zombie business failing.
"UK plc is at a crossroads but there are strong, talented businesses in the pack that are eating through their debt and building strength. Many of the companies we analysed had a liquidity ratio above 1.5 meaning they were in a solid position to thrive after this pandemic. They can hold the debt they have and they can hoover up the wealth of opportunities that zombie companies leave behind.
"The creditors for these businesses will benefit and can provide more finances to support growth, but we have to be sure that lendees are in a good position to pay back their creditors. Our role now will be to ensure that we restructure and revive where possible, then reinforce the UK's businesses that have the best chance to survive and thrive in the years to come."