The third quarter ‘Red Flag Report’ on UK corporate financial health from insolvency and advisory firm Begbies Traynor (BEG:AIM) shows fewer businesses in what it calls ‘significant financial distress’ than the second quarter, but warns of a rise in creditors chasing companies through the courts which it says ‘paints a gloomy picture’ for future insolvencies.
The report, which began in 2004 and uses Begbies’ own algorithm to combine in-house data with other legal and financial data, classifies firms as in ‘significant’ difficulty if they have minor county court judgements against them or they show up on its proprietary credit risk scoring system.
CLOUDS LIFTING
In the three months to September, the number of firms classed as in ‘significant’ distress reached 562,550, a decrease of almost 89,000 or 14% from the second quarter.
The report puts the improvement down to rising corporate revenues as pent-up customer demand fueled a boom in consumption and allowed many firms to improve their short-term cash flows and financial position.
The three worst affected sectors during the quarter were support services, construction, and real estate and property, although in the case of real estate and property fewer firms were classed as in ‘significant’ distress than either the first or second quarters.
Moreover, the bounce back in leisure and cultural activities continued into the third quarter with the sector no longer appearing on the top 10 ‘most distressed’ list.
COURT CASES MOUNTING
The report came with a major caveat, however, as the number of firms being pursued through the courts by creditors jumped 50% to nearly 22,000 between the second and third quarters.
County court judgements or CCJs are often a bellwether for future insolvencies, and as court activity picks up more firms are able to start proceedings against companies which owe them money.
Chairman Rick Traynor said while the overall fall in financial distress was ‘welcome news’, he was still ‘concerned that trading conditions will deteriorate for many companies as supply chain issues affect output and input costs continue their upward trajectory’.
He added, ‘These challenges combined with more aggressive creditor action, as evidenced by the rise in CCJ's, demonstrate that companies are taking a tougher line to recover debts, as evidenced by the recent rise in insolvency levels.’
SILVER LINING
If there is any upside to the report for investors, the rise in court cases is positive for UK insolvency practitioners and the firms which provide litigation finance such as Manolete Partners (MANO:AIM) and RBG Holdings (RBGP:AIM).
Nicola Foulston, chief executive of RBG Holdings, pointed to an upturn in both litigation and financing opportunities last month when the firm published its interim results.
‘Our legal services business continues to receive a high volume of new client instructions (while) our corporate and dispute resolution practices have performed exceptionally strongly. After its first year of operation, our litigation finance business has been a success already funding ten third-party cases’, said Foulston.
Disclaimer: The author owns shares in Manolete Partners
