“Zombie firms,” kept alive by low interest rates, account for up to 14% of UK companies.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
The number of companies in the UK going into administration — which is when a licensed insolvency “administrator” is appointed to manage a company’s affairs, business, and property for the benefit of the creditors — jumped by 21.8% in Q1 2019 to 451, the highest quarterly level in five years (although the number of administrations is still much lower than during and after the Financial Crisis).
In Q1, the number of small businesses going into liquidation rose 5.1% compared to the same period a year ago, to 4,187. Liquidations also rose 6.3% from the fourth quarter of 2018, according to The UK Insolvency Service.
“Both the total number of new company insolvencies as well as underlying total insolvencies have reached their highest levels since 2014,” said Mike Cherry, chairman of the Federation for Small Businesses. “These latest figures show the immense strain that small businesses are currently under with rising employment costs and unfair business rates as well as significant uncertainty as a result of the Brexit process.”
The number of companies classed as being in “critical distress,” often a precursor to insolvency, surged 17% in the first quarter from a year earlier, to 484,000 mostly small and medium-sized businesses, according to data compiled by financial adviser Begbies Traynor Group Plc. These businesses in “critical distress” now account for about 14% of all active businesses in the UK.
“Many U.K. businesses are currently in limbo and deferring major investment decisions,” Julie Palmer, a partner at Begbies Traynor, said in the report. “This, combined with consumers holding back on big ticket purchases, has resulted in increasing significant distress across many sectors.”
This number chimes with the findings of a new report by Big Four accountancy firm KPMG that warns that as many as 14% of all UK companies could be classified as “zombie firms”, whose symptoms include static or falling turnover, persistently low profitability, squeezed margins, limited cash, high leverage levels, and a chronic inability to invest for the future.
The highest concentration of zombie companies is in the energy sector, where 23% are under sustained financial strain, the automotive sector, with 17%, and in utilities, with 15%.
Growing ranks of struggling firms that are being kept alive by persistently low interest rates have created a drag on UK productivity, which continues to under perform compared to other G7 economies, KPMG said. Productivity is around 20% lower than what it would have been if it had continued at pre-financial crisis levels, according to the Office for Budget Responsibility (OBR).
In terms of small-business insolvencies, construction, administration, and retail were the sectors hardest hit. The construction sector, which is notoriously beset with late payments, has the highest level of insolvencies, up 0.6% in 2018.
Late payment of suppliers and subcontractors is a widespread problem in the UK. Perversely, the worst offenders are often large companies that claim to comply with official payment codes. For instance, Carillion, the outsourcing behemoth that went bankrupt in January 2018, taking hundreds of suppliers with it, was fully signed up to the government’s prompt payment code, despite the fact it was making suppliers wait 120 days or more to get paid.
In April five large companies — BHP Billiton, DHL, GKN Plc, John Sisk & Son and tea maker Twining — were removed from the government’s Prompt Payment Code (PPC) for failing to honor a pledge to pay 95% of all supplier invoices within 60 days. Another 12 (Balfour Beatty, Costain, Engie Services, Interserve Construction, Kellogg Brown & Root, Laing O’Rourke, Persimmon Homes, Atos IT Services, British Sugar UK, Rolls-Royce, SSE and Vodafone) were suspended, rather than expelled, because they promised to change their late payment practices.
The government has threatened to punish companies that fail to comply with the PPC by preventing them from bidding for government contracts. Whether it actually follows through on the threat is yet to be seen.
There are also signs that the recent slowdown in the UK’s manufacturing sector may be spreading to the country’s all-important services sector, Palmer at Begbies Traynor says. In other words, if the British government and parliament don’t get their act together in the next few months and find a way of reaching some degree of consensus on Brexit, the U.K. may face a broader economic slowdown.
The EU’s decision, largely at Westminster’s behest, to extend the Brexit deadline until Oct. 31, rather than providing much-needed clarity, has produced yet more confusion and uncertainty. “The politics of Brexit have become more protracted and, as a result, the side-effects of Brexit on the UK economy have intensified,” arch-remainer Goldman Sachs said in a note to clients last week titled ‘Brexit — Withdrawal Symptoms’.
Right now, small businesses need all the help they can get as Brexit uncertainty and other problems take their toll on business and consumer confidence. But instead of that, a whole new problem could be about to emerge if the government carries through on plans to move tax debts up the pecking order for recoveries when companies go bust, above debts owed to suppliers, consumers, pension schemes and employees, as well as common types of lending debts. As insolvency practitioners are warning, that could have the effect of restricting lending to small companies. And that is the last thing the UK’s struggling small businesses need right now. By Don Quijones.
February was bad for London’s housing market. And the weakness is now spreading out from London. Read… London Home Prices Had Biggest Monthly Drop Since Lehman
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Nothing a surprise rate cut won’t solve.
Hehe, who is gonna buy the Debt ? They will still yield Junk rates, Cuts won’t matter
Excellent Article!
Exactly,
Trash is still trash. We shouldn’t be surprised to find a banker or two to package it up and sell it into some pensions somewhere in the CCC tranche.
This is just one side effect of QE. Money goes to worthless companies and projects. Others include buybacks. Money too cheap. They are destroying money.
Correct. Money ( better, currency ) in nowadays zero ( or, even negative ) CB interest rates environment is worthless.
+ 1
hi don maybe I missed it, but what happened to the Aldous bill.. was it last October?
That’s not much different in the US. The other half of the equation are the number of businesses/individuals that have remained solvent solely on cash out refinances. One of my friends built a 150-unit complex in the 1980s. He’s refinanced that thing about 10 times, and now owes about 7x the original buildout costs. For the past 15 years, he was doing great, because he was using the cash to buy beach houses, which he promptly leveraged to more beach houses… Now he can’t unload any of it, but at the same time, he doesn’t care if he dies insolvent, because he’s had tons of fun
That’s a really good analogy for the boomer generation, except the millenials are expected to pick up the tab.
Actually it’s highly probable bank shareholders (you know, rich people) & the FDIC (funded by…GASP!…bank profits) will pick up the tab.
Hi Don
Despite what others say I like your content.
As a result of these types of monetary policies, I doubt firms even need to worry about anything other than cash flow or stock valuation. As the great Keynes once said the market can remain irrational longer than you can remain solvent, we’ll see what happens next.
A lot of the big-company bankruptcies in the UK look like accounting fraud and looting by management to me. Higher interest rates may prevent them from continuing their shenanigans, but are not the root cause of the problem.
Didn’t realize “others” were saying less than good things about DQ’s content.
I enjoy the hell out of his non-domestic reporting. He has a knack for describing crazy situations with clear explanations and answering the anticipated critical follow-up questions. Plus, DQ provides relevant facts & statistics.
How ever many votes I get for foreign correspondents (I don’t live in Chicago), I vote ’em all for DQ.
thanks don, 10% to the little guy bidding.. is his profit, ‘The government has threatened to punish companies that fail to comply with the PPC by preventing them from bidding for government contracts. Whether it actually follows through on the threat is yet to be seen’, mean time feign whoa to me little guy going under.
same same
I’m a small business owner in the UK, any company who’s T/O is less than £1 million is placed in this category. We make up 95% of companies in the UK. We generally sell and trade to the people who live within a 30mile radius of our premises. We are taxed 20% VAT (the same rate as a company with a T/O of billions, there is no sliding scale) this rate is imposed on us by the EU, as well as many other onerous types of “red tape” that makes sure that we pay an inordinate amount of tax. This is the reason why we want OUT of the EU. This is also why the EU won’t let us leave. Our prime minister is doing as she is told by the mandarins who run the EU council. Without the billions of £ that the British taxpayers plough into the EU it would be bankrupt. That is the only reason why Brexit effects small businesses in the UK.
The EU is crapping its pants because the UK is going to leave .
Countries in trouble like Italy, Portugal,Spain and Greece to name but four , will have to be bailed out by Germany without UK money coming to their rescue.
The UK economy is going along fine now thanks, much better now than Germany. The AIM index of smaller companies is doing better than the main FTSE 100 index.
When the Brexit Party wins a large number of seats in the EU elections May 23rd folks will wake up and smell the coffee.
The Brexit Party will win a significant number of seats in the next UK elections because we the ordinary folk that voted to ‘leave the EU’ NOT for any kind of deal … that Toxic Theresa has fudged into the process … those seats will determine who will rule the UK next .
Tory and Labor will both want to do a deal with the Brexit Party to form the next UK coalition government.
The Brexit Party will insist we leave. No deal . We leave.
The Euro and the EU dream will both be dead within 3 years after as other countries do likewise.
Good riddance and then we will change our name to Great Britain once more.
Keep Dreaming. The Brexit Party is the do nothing party, they will once again screw up Brexit and then whine forever about how “Brexit was Betrayed”.
You have the heart of the matter. I’m a Conservative party member and will absolutely vote for a Brexit Party candidate, to replace our current Tory MP who has been less than firm in the cause of detaching us from the maw of the EU beast.
We are an island nation; our moat is our liberty and our industriousness will serve us well when our sovereignty is restored.
“The Brexit Party will win a significant number of seats in the next UK elections” “Tory and Labor will both want to do a deal with the Brexit Party to form the next UK coalition government.”
That would be great for democracy and leaving the EC in real.
I thought the same about UKIP at the last general election and didn’t win any seats did it?
The establishment left wing mainstrean media made UKIP toxic to most dumbed down voters with constant ‘waycist’ allegations. They’ve already started doing this with the Brexit Party. I think this time more people are aware of this tactic; the environment has changed too due to the brexit betrayal.
“Growing ranks of struggling firms that are being kept alive by persistently low interest rates have created a drag on UK productivity, which continues to under perform compared to other G7 economies, KPMG said.”
G7, that includes the Euro Three & Japan with even lower interest rates. Can’t see why ultra low interest rates would be a bigger drag on the British economy than for instance Japan or Germany.
ps. Don’t know if Canada also has a ultra low interest rate and i’m to uninterested to look it up. US only changed very recently from an ultra low to a very low interest rate. KPMG don’t want to say the obvious reasons why Britain underperforms. Brexit and government paralyzation because of Brexit.