Cost of living crisis hits ‘zombie’ companies

Companies are registering increased levels of financial distress as directors grapple with rising costs and a downturn in spending by both consumers and businesses.

The number of companies in significant distress has risen by 8.5 per cent in the second quarter to 438,702, according to research by Begbies Traynor.

The restructuring group’s red flag report said that the highest numbers of companies in difficulty were in the support services, construction and real estate sectors amid a downturn in the housing market and a decline in manufacturing. Businesses reliant on non-essential spending such as leisure providers, travel companies and hospitality venues also showed high levels of distress.

People have been cutting back spending in some areas as they face higher energy and mortgage costs, while factories are reporting a drop in output and orders from businesses.

City AM, the news publication, became a recent casualty of the downturn as it appointed administrators at BDO and was bought through a fast-track insolvency process by THG, Matthew Moulding’s beauty and nutrition business. THG has paid a “small seven-figure sum” for the business after the freesheet’s finances were rocked by a fall in commuter numbers.

Public companies are also issuing an increasing number of profit warnings as they cite concerns with tightening credit conditions, the cost of living and upheaval in the labour market.

UK-listed companies issued 66 profit warnings between April and June this year, according to EY, the accounting firm, with the construction sector making up 10 per cent of the total.

Ric Traynor, executive chairman of Begbies Traynor, said companies that previously had “clung on” were now coming under pressure from higher financing costs. “Many of these will have been the so-called zombie companies which were marginally profitable in the era of low rates,” he said. “The reality is that many of them are likely to fail over the next year.”

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Cost of living crisis hits ‘zombie’ companies