Administration levels set to rise in 2011

According to new research by business recovery specialist Begbies Traynor, the number of UK companies likely to fall into administration looks set to rise this year, possibly by as much as ten per cent.


Towards the end of 2010, the number of companies – of all sizes – suffering financial distress skyrocketed. Almost 150,000 firms reported cashflow difficulties during the three months to January, representing a sharp incline of 20 per cent on the previous three months.


Sectors particularly hard-hit included retail, IT services, construction estate agents and engineers, which were impacted by the public sector spending cuts, tough lending criteria and an expectation of a rise in the cost of borrowing in line with rising interest rates.


This sharp rise in the number of administrations opens the door for ready and able cash buyers looking for a bolt-on opportunity or acquisition for their own portfolio. Many firms will be so keen to sell that there may be a host of bargains on offer; so willing buyers can use this situation to their advantage.


Begbies Traynor’s research also revealed the first year-on-year growth – of four per cent - in financial distressed firms since the middle of 2009, when the market hit its lowest point. The aforementioned rising interest rates are expected to force those companies – already bowing under the weight of long-term debts - to call in the administrators.


UK head of restructuring at KPMG, Richard Fleming, agreed, saying, “A lot of businesses have been hanging on by a thread because money is basically free, so they can survive on reduced levels of activity.


“It is already a fragile situation and the danger is that even a 0.5 per cent rate rise could tip them over,” he added.

As small and medium-sized enterprises (SMEs) have historically relied heavily upon financing from banks, a rise in the cost of borrowing could have a potentially disastrous impact. Already, many SMEs are being forced to slash their prices – something they can ill afford to do – in order to remain competitive alongside larger rival firms, who are also desperate for the work.


The sectors tipped to experience the highest level of administrations over the course of 2011 are those dominated by small businesses, such as manufacturing and construction. Since the 2008 collapse of Lehman Brothers, more than 10,000 construction-related companies have been forced either into administration or liquidation, and the strongest contraction of the sector since the 1970s looks set to rage on throughout this year.


Noble Francis, economics director at the construction sector's key trade body, Construction Products Association, warned, “If you’ve got rate rises kicking in, falling workloads and serious difficulties obtaining finance, then you are going to get a very harsh situation very quickly.


“The vast majority of building firms are small and medium-sized entities and simply don’t have access to finance beyond the banks.”


Companies teetering on the brink may well look favourably at offers to merge, so M&A activity could well see a rise as a reflection of the high level of administrations in 2011.

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