KPMG warns of rise in zombie businesses
The number of so-called zombie companies, defined as those operating under sustained financial strain, is rising and causing a significant drag-effect on the UK economy, according to analysis from KPMG
8 May 2019
KPMG is warning banks and regulators to take action now to head off future problems, having investigated the last three annual accounts of listed UK companies (FTSE and AIM) and found that that 8% of UK companies currently display zombie-like symptoms. But based on the latest data from 2018, and taking account of the recent increase in interest rates, the share of zombie companies spanning the whole of UK plc could be as high as 14%.
The analysis also focused on the prevalence of zombie companies by sector, with the highest concentration in the energy (23%), automotive (17%) and utilities (15%) sectors.
Yael Selfin, chief economist at KPMG in the UK, said: ‘The threat that zombie companies pose to the wider economy is very real, regardless of what the post-Brexit environment looks like. Many unproductive businesses have been able to stumble on in recent times, generating just enough profits to continue trading but without the innovation, dynamism or investment necessary to sustain bottom-line growth. This has, and will continue to, create a drag on UK productivity, which continues to lag our peers in the G7 and much of Europe.
‘If interest rates rise further, highly-leveraged businesses may soon find that borrowing will become more difficult to repay, and if the economy continues to stutter, these businesses will be left especially vulnerable to adverse market forces or a tightening of liquidity – as will the lenders they rely on.’
Of the 21,000 private companies KPMG analysed, 60% display one or more of the symptoms associated with zombies, while just 8% display three or more. The worst affected industries are travel and leisure (12%), real estate (11%), financial services (10%) and professional services (10%).
For the past decade, zombies have been allowed to sleep walk largely undisturbed, thanks to an extraordinary monetary and political environment
Blair Nimmo, head of restructuring at KPMG in the UK, said: ‘For the past decade, zombies have been allowed to sleep walk largely undisturbed, thanks to an extraordinary monetary and political environment, coupled with lenders exhibiting greater creditor forbearance to struggling companies in their portfolios.
‘The uncomfortable truth, however, is this environment is unlikely to persist indefinitely. In the event of a liquidity squeeze, many of these underperforming businesses would fail – and if this happens, the potential for contagion is very real, creating broader challenges for an economy already struggling to deal with a plethora of issues.
‘Urgent dialogue is required between regulators, banks and businesses in order to minimise the ongoing drag that these companies have on the economy, and to mitigate against potential risks in the event of an economic downturn.’