UK businesses hold 52% of toxic debt
Toxic Debt Increase
New data from Begbies Traynor Group has found that corporate debt has increased by £1.9tn in 2020 to £6.6tn and 52% of UK businesses are saddled with “toxic debt” that may never be repaid.
Tax returns filed for 2020 by these companies show they would struggle to pay their bills within the following 12 months (liquidity ratio of less than 1). The corporate debt growth in 2020 is considerably higher than the £306bn revealed in 2019 tax returns. Due to the amount of toxic debt, Begbies Traynor predicts the amount of zombie companies (that is, companies that service their debt but not pay the principal sum) to be on the increase, with a real risk that more debts will be called in via the courts.
The data also illustrated that there are some business sectors more at risk than others, with 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.
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.”
