Number of distressed companies rises in UK

The number of firms entering insolvency and administration processes both saw double-digit growth in the UK last year. According to research from FTI Consulting, that situation may continue well into 2024.

Companies across Europe are coming under increasing pressure – as the continent’s economy continues to flirt with recession. With limited prospects for growth, and rampant inflation still crippling consumer spending power, many firms are in a fight for their very survival.

The UK has been no exception to this. The nation’s turbulent economic performance pushed a growing number of firms to the brink in the last 12 months – with more than 5% of its companies now understood to be ‘zombie’ firms, which are still in operation, but are unable to meet their debt interest obligations.

According to new figures from FTI Consulting, UK insolvencies increased steadily over the 12 months to December 2023 at a rate of 14% compared with the prior corresponding period. And with low business confidence, tougher financing conditions and the fact the value of the British pound was its best against the US dollar since 2017, merger and acquisition interest in the market diminished – meaning many distressed firms that otherwise might have been bought for turnarounds did not get the help they would usually hope for.

“We have seen an increase in businesses coming to market but most were not suitable to turnaround investors as the least investible companies were typically the ones experiencing difficulty,” explained Callum Greig, an FTI managing director.

As a result, there was a notable 27% increase in administrations – which climbed to their highest levels since 2019 at multiple points of the year. According to the researchers, this was also tied to a continued trend since 2022, with decision-makers now aware that Covid-19 support measures for ailing businesses have been withdrawn, making potential turnarounds even harder. In this context, as well as with interest rates growing, many firms are simply folding.

In particular, the sectors exposed to discretionary expenditure were the ones which suffered the most in 2023, as consumer spending power continued to decline. This has led deal makers cite retail, consumer goods, leisure and construction as the most active in terms of opportunities for so-called special situations deals – purchasing their assets once they enter administration procedures. These are also the sectors which special situations specialists expect will continue to present opportunities – and see a continued rise in administrations – in 2024.

To that end, Ben Hughes, a senior managing director at FTI, noted, “We anticipate an increase in the volume of special situations opportunities as headwinds remain strong and sponsors are under more pressure to divest.”

In terms of the causation behind the increased levels of distressed M&A activity, and the trends which investors expect this to continue into 2024, unsustainable debt servicing costs and failed refinancings accounted for more than 40% of survey responses. This was followed by cost inflation and customer demand which respectively accounted for approximately 20% each. Looking ahead, FTI anticipates that this will lead to a rise in distressed activity for listed businesses in particular, which will “find it increasingly difficult to raise funding in the current environment and may require some form of insolvency process to transact”.