Insolvent business debt fell by £189m during the last quarter due to financial support from the government and lenders, new research has shown.
A report by corporate distress data analysts Red Flag Alert found that total levels of insolvent business debt at 30 June 2020 were £1.577bn, down 10.7 per cent from £1.766bn at the end of March.
It attributed the decline to Covid-19 support measures such as state-backed loans, flexible payment terms and less formal action against companies in serious financial distress.
The quarterly decline is in complete contrast to this time last year, when saw total insolvent debt grow by £161m from April to June 2019.
However, analysts predict that the decline will be short-lived.
“Total insolvent debt has declined because struggling companies have been able to draw on financial support from the government and provided with more breathing space by businesses they owe money to,” said Mark Halstead, a partner at Red Flag Alert.
“This has created a reverse-effect for total debt. In contrast, insolvent debt in retail has grown by around £6m, which seems like a much lower number in comparison, but actually represents a 12.6 per cent increase during the last quarter.
“This growth is important because retail performance is an early indicator of levels of consumer confidence and economic volatility. It’s a sector that accounts for high levels of employment and affects the performance of many other industries such as logistics and manufacturing. Both of these have also seen varying rises in written off debt during the last quarter and we can expect more sectors to follow suite in the coming months.”
Red Flag Alert’s data showed that insolvent debt in the manufacturing sector grew by 17.4 per cent from £89.6m to £105.2m, while logistics ticked up by 0.84 per cent, taking debt levels to £62.3m at the end of June.
The construction and property sectors saw one of the UK’s highest levels of insolvent debt, rising by 2.2 per cent quarter-on-quarter to £371m at the end of June.
“This quarter’s figures have been skewed by the Covid-19 measures introduced by government and positive steps quickly taken by companies during lockdown,” said Halstead. “We’re now coming to the end of government support and can expect businesses to enter a more protectionist mode as they fight for survival. With this in mind, it’s likely that insolvent debt will see a sharp upwards trajectory over the next six months.”