- More UK companies at risk of failure
- Mortgage arrears also rising fast
- Big banks appear unconcerned
Just in time for Halloween, corporate advice and insolvency firm Begbies Traynor (BEG:AIM) has released its latest Red Flag Report showing a sharp rise in the number of ‘zombie’ UK companies.
At the same time, global credit intelligence firm Pepper Advantage has published data pointing to a frighteningly high level of UK mortgage arrears, which combined with the Red Flag Report signals storm clouds are gathering for the banking sector.
FINANCIAL DISTRESS SPREADING
According to Begbies Traynor, more than 37,700 UK businesses now find themselves in ‘critical’ financial distress, an increase of 25% between June and September, due to high inflation, high interest rates and weak economic confidence.
While consumer-related firms like retailers have seen a sharp increase in critical financial distress, ‘pressures are now clearly being seen beyond consumer-facing sectors and are becoming widespread, particularly within the construction and property sectors’ says the report.
No fewer than 18 of the 22 sectors covered saw a double-digit rise in companies in critical financial distress from the second quarter to the third quarter, with construction seeing a 46% jump and real estate and property services experiencing a 38% increase.
In total, around 480,000 businesses across the UK are in ‘significant’ financial distress, nearly 9% more than in June.
‘With many UK companies accustomed to years of near zero interest rates and access to government-backed Covid support loans, the new world of elevated interest rates will continue to push many businesses the very edge of failure’, warns the report.
So far, UK banks have brushed off concerns over bad loans with only a small increase in provisions across the sector in the most recent set of results and most lenders talking up the quality of their assets.
MORE MORTGAGES FALLING BEHIND
Adding to the gloomy outlook, the latest survey by Pepper Advantage of its 100,000 UK residential mortgage portfolio shows a 23% jump in arrears in the third quarter compared with 2022 to mark a new post-pandemic high.
The number of fixed-rate mortgages falling into arrears grew more than 50% year-on-year, although this was from a low base and the absolute amount of fixed-rate arrears is relatively small.
However, the rate of variable mortgages in arrears climbed nearly 30% to a quarter of the variable portfolio and this represents a much larger amount in absolute terms.
The growth in arrears is corroborated by the rate of DDRs (direct debit rejections), which increased by 19% in the third quarter and has been rising by double digits throughout 2023.
The credit firm expects economic pressure on borrowers to continue driving up arrears in the current quarter and into next year, a view echoed by the Bank of England in its latest Credit Conditions Survey.
The central bank sees mortgage defaults increasing in 2024 as it believes only 20-25% of the impact of its interest rate rises has so far filtered through to the real economy.
