The ‘zombie
businesses’
phenomenon:
An update
Zombie: a) a dead human that’s been
reanimated to a state between life and death.
~ business b) a company only able to service
interest on its debt but not the debt itself
January 2014
Introduction
As the economy begins to recover, so the
number of ‘zombie businesses’ – those only able
to pay the interest on their debts – has begun to
fall. Some of the factors – although by no means
all – that helped create these businesses are
beginning to disappear.
Having reached a peak of 160,000 in November
2012, there are now just 103,000 businesses
paying off the interest on their debts alone.
The decline of ‘zombie businesses’ – without
a significant impact on corporate insolvency
numbers – is welcome. Many businesses that
previously fell into this category will have used
low interest rates and the extended gap between
recession and recovery to move to surer
financial footing.
However, that does not necessarily mean it
is the end of the ‘zombie’ story. While many
‘zombie businesses’ will have returned to good
financial health, there is a significant number of
businesses that have moved from ‘struggling but
surviving’ to full-on struggling.
And, while in August there were 34,000
businesses who felt they would be unable to
meet their debt obligations if interest rates
were to rise slightly, there are now 96,000 in
this position.
Policy makers will need to watch those
businesses that have moved beyond ‘zombie
business’ status carefully. Early interest rate
rises could seriously hinder these businesses’
attempts to survive.
As the trade body for the UK’s insolvency
practitioners, R3 is well placed to observe the
‘zombie business’ phenomenon. Our members
are experts in spotting signs of ailing businesses,
and working with businesses to help them on the
road to recovery.
Liz Bingham
President of insolvency trade body R3
In our last report (June 2013), there were
137,000 businesses that were negotiating
payment terms with their creditors; there are
now 166,000.
Key findings:
• There were 103,000 ‘zombie businesses’ – those only able to pay the interest on their debts –
in November 2013, down from a peak of 160,000 in November 2012.
• A record number of businesses – 166,000 – were negotiating payment terms with creditors in
November 2013. Whereas ‘zombie businesses’ are ‘struggling but surviving’, those negotiating
payment terms with creditors are at a ‘make or break’ point.
• The number of businesses concerned that they would be unable to repay their debts if
interest rates were to rise has almost trebled from 34,000 in August 2013 to 96,000 in
November 2013.
• Some businesses have used the unique economic circumstances since end of the recession
to sort out their finances and avoid insolvency.
R3
The ‘zombie businesses’ phenomenon: An update
January 2014
2
What are the UK’s ‘zombie businesses’?
The arrival of a recession brings with it headlines
worrying about job losses and business closures.
While incidences of both do indeed rise during a
recession, business failures actually reach their
peak sometime after the end of a recession,
during the early stages of recovery. This is called
the ‘insolvency lag’.
In the mid-1970s, corporate liquidations in
England & Wales peaked in the year after
recession ended, and in the early ‘90s recession,
the liquidation rate (the share of the corporate
population that has been liquidated) peaked – at
2.65% – in the first quarter of 1993, a year and
a half after the recession ended towards the end
of 1991.1
There are several reasons why this happens:
• Despite the tough trading conditions in a
recession, many companies are able to ‘ride
out’ the recession by relying on cash reserves
or cutting back on investment. By the time
recovery comes around however, cash
reserves are exhausted or – thanks to the lack
of investment – the business isn’t ready to
cope with rising demand or able to keep up
with competitors.
• Rising demand, as typically experienced
during economic recovery, will place added
strain on a business as it tries to meet new
orders. Production lines, business plans and
organisational structures, logistics, equipment,
and cash flow all need to be ready to cope
with a change in the level of business activity.
• During a recession, creditors are less likely
to put pressure on their debtors: creditors
understand the difficulties their debtors are
going through, and, besides, creditors know
their forbearance could help keep the debtor
going – keeping a customer during a recession
is much easier than finding a new one. Come
the recovery though, creditors can become
much more bullish and will start to call in debts
that are owed to them.
The 2008-9 recession, however, was different
to previous recessions. Corporate insolvencies
did not peak after the recession but during it;
and the peak insolvency rate was much smaller
than before too, reaching only 0.95% in the final
quarter of the recession before falling away again
(the raw numbers of corporate insolvencies in
2008-9 were also slightly lower than in the early
‘90s, despite the growth in the UK business
population in the intervening two decades).
England & Wales Company Liquidations, seasonally adjusted (years with recessions in red)
In the 1980s, corporate liquidations peaked in 1985, having climbed steadily from the end
of the recession in 1981
1
R3
The ‘zombie businesses’ phenomenon: An update
January 2014
3
The much smaller than expected peak in
corporate insolvencies, and lack of a post-20089 recession ‘insolvency lag’ has been attributed
to so-called ‘zombie businesses’. R3 has defined
these businesses as those that are only able
to pay the interests on their debts, but not the
principal itself; for some businesses, only special
circumstances, such as record-low interest rates,
are keeping them afloat.
Businesses that could fall into the ‘zombie
business’ category can exist at any stage of
the economic cycle, while the category itself
can contain several different types of business,
including start-ups. However, it is likely that the
exceptional circumstances that surrounded
the 2008-9 recession helped swell the ranks of
‘zombie businesses’.
Liz Bingham comments: “Since the recession,
forecasting corporate insolvency numbers has
become much harder than usual. In terms
of corporate insolvencies, this recession and
recovery have been surprising.
“Corporate insolvencies have always jumped
up after recessions, but a stuttering recovery,
government support schemes, creditor
forbearance, and low interest rates have kept
thousands of otherwise unviable businesses
going this time around. The typical postrecession corporate insolvency ‘spike’ never
arrived and the past few years have been
unexpectedly quiet for the profession.”
R3
The ‘zombie businesses’ phenomenon: An update
“The typical post-recession
corporate insolvency ‘spike’
never arrived and the past few
years have been unexpectedly
quiet for the profession.”
January 2014
4
Why was the last recession different?
The number of ‘zombie businesses’ grew to
160,000 – 9% of the UK business population2 –
in November 2012, up from 146,000 in June
that year.
There were a number of factors that help
explain the boom in the number of businesses
in this situation:
• Bank of England interest rates hit a record
low of 0.5% in March 2009 and have stayed
there ever since (and are likely to stay there
for the next year too). Low interest rates
helped struggling businesses meet their
debt obligations even if they had no
chance of paying off all their debts in the
foreseeable future.
• Creditors, particularly banks, have been
unusually patient with struggling businesses
since the recession. Political pressure on
the banking sector over lending and small
business support (following the bank bailouts
in 2008) may have contributed to this. Similarly,
government support schemes, like Time To
Pay, helped ease the burden on businesses
struggling with tax payments.
Do we still have ‘zombie
businesses’?
• While struggling businesses often find
economic recovery difficult, the UK has had
to wait a long time for the recovery from
the 2008-9 recession to arrive. Economic
output is still below where it was before
the recession, making this the UK’s most
prolonged economic recovery on record.
Periods of sustained growth have been few
and far between since 2009, taking some of
the pressure off businesses.
Higher interest rates, more active creditors, or a
quicker recovery all could have meant the failure
of ‘zombie businesses’.
UK businesses that say they are only able to pay the interest on their debts
The recent upturn in the UK’s economic fortunes
has been matched by a steady decline in the
number of businesses that are only able to pay
the interests on their debts. From a peak of
160,000 businesses in this position in November
2012, ‘zombie business’ numbers fell to 135,000
in February 2013, 108,000 in May 2013, and
102,000 in August 2013, before climbing very
slightly to 103,000 in November 2013 (6% of the
UK business population).
2
Of businesses with an annual turnover of at least £50k
R3
The ‘zombie businesses’ phenomenon: An update
January 2014
5
What happened to the ‘zombie businesses’?
Although ‘zombie business’ numbers have
fallen steadily from their peak, there has not
been a corresponding rise in the number of
company liquidations. Since the second quarter
of 2012, the liquidation rate has continued to
fall, from 0.75% to 0.63% by the third quarter
of 2013.
It is very likely that some ‘zombie businesses’
will have taken the opportunity presented by
low interest rates, creditor forbearance, and
the slow recovery to take a good look at their
business model, change how they do things,
and return to financial health.
However, not all ‘zombie businesses’ will be in
either of these two positions just yet. As well as
tracking the number of ‘zombie businesses’,
R3 has also tracked the number of businesses
with signs of serious cash flow problems.
While some of the companies in the ‘zombie
business’ category in June 2012 will have failed
since, failure has not been the only future for
the rest of the businesses in that category.
UK businesses that are…
Jun-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Having to negotiate payment terms with
creditors
130,000
75,000
74,000
137,000
93,000
166,000
Unable to repay debts if small increases
in interest rates
145,000
91,000
47,000
69,000
34,000
96,000
Struggling to pay debts when they fall
due
110,000
111,000
101,000
134,000
98,000
56,000
Just paying interest on debts
146,000
160,000
135,000
108,000
102,000
103,000
R3
The ‘zombie businesses’ phenomenon: An update
January 2014
6
While ‘zombie business’ numbers have fallen,
there has been a steep climb in the number of
businesses now finding themselves needing
to speak to creditors about their payment
terms – in a sense, this is a step ‘beyond’ being
‘zombie businesses’ who at least could be seen
as ‘ticking along’ rather than being in imminent
danger of insolvency.
The number of businesses negotiating with
their creditors has leapt to 166,000, 10% of
the UK business population. This is the highest
number of businesses recorded by R3 in any
one category since this research began. Unless
these businesses can come to an arrangement
with their creditors, insolvency is a real risk.
“It wasn’t so long ago that interest
rates weren’t expected to rise until
2017 or 2018. Now 2015, or even
the end of this year, could be when
the cost of borrowing goes up.”
On top of this, there has recently been a big
jump in the number of businesses that say they
would be unable to pay their debts if interest
rates were to rise. Having fallen to 34,000,
the number of businesses in this category has
trebled since August to 96,000.
Liz Bingham comments: “Encouragingly,
many struggling businesses will have used the
unexpected grace period between recession
and recovery to put their house in order,
allowing them to spring ‘back to life’.
“However, the number of businesses that
are negotiating with their creditors is a
potential cause for concern. It’s a positive that
businesses are taking action and addressing
their problems by talking to their creditors. But,
unfortunately, successfully negotiating new
payment terms that work for both the creditor
and debtor isn’t always possible.”
R3
The ‘zombie businesses’ phenomenon: An update
“It is also particularly worrying that so many
businesses are concerned about the impact
of interest rate rises on their ability to meet
their debt obligations. It may well be that
the continued fall of the unemployment rate
towards 7% – which would trigger a ‘knockout’
clause in the Bank of England’s Forward
Guidance policy on interest rates – is beginning
to focus the minds of some businesses.”
“It wasn’t so long ago that interest rates
weren’t expected to rise until 2017 or 2018.
Now 2015, or even the end of this year, could
be when the cost of borrowing goes up.”
January 2014
7
What will happen next?
Not all of the companies negotiating with their
creditors will end up in an insolvency procedure:
some companies’ creditors may well agree to
new payment terms. On the other hand, many
of the businesses in this category will be unable
to come to an arrangement with their creditors,
and an insolvency procedure would be one of a
number of possible consequences.
This does not necessarily mean that a belated
‘spike’ in corporate failures is on its way:
businesses engaged with their creditors do
have options, while many of the businesses that
would have made up this ‘spike’ have already
taken advantage of the protracted nature of the
economic recovery to move onto more sound
financial footing.
Still, there are a very significant number of
businesses who are in a difficult financial position.
One of the problems with the presence of
‘zombie businesses’ is that it has been hard
to distinguish between struggling but viable
businesses and those businesses whose
failure is likely. Given the changing economic
circumstances, that distinction is becoming
easier to make.
Liz Bingham says: “There have been very few
positive stories to come out of the financial crisis
and the record-breaking recession that followed
it, but perhaps some good news can be found in
the ‘zombie business’ phenomenon.
“The unique combination of factors that created
the ‘zombie business’ phenomenon could
also be said to have a produced a group of
‘comeback kid’ businesses. These are the
businesses that would ordinarily have become
insolvent in a recovery, but who have taken
advantage of the circumstances to avoid
liquidation and go from strength to strength.
R3
The ‘zombie businesses’ phenomenon: An update
“There are, however, still plenty of businesses
that have been unable to address their problems.
Administrations or CVAs [Company Voluntary
Arrangements] might be an opportunity for these
businesses to do this, but for the rest, liquidation
could be the only option.
“With so many businesses still in a difficult
financial situation, it is important that policy
makers tread carefully. While a ‘spike’ in
corporate insolvencies is unlikely, it would not be
entirely surprising if, once interest rates begin to
rise and the economic recovery shifts through the
gears, corporate insolvencies ended up higher
than might normally be expected several years
after a recession.
“As unemployment continues to fall, the Bank of
England’s 7% unemployment Forward Guidance
‘knockout’ figure is getting closer and closer.
Many expect interest rates to rise next year.
However, a higher cost of borrowing would be
a real test for some businesses and could lead
to corporate failures. This, in turn, would have
a negative effect on unemployment numbers
and could also spell trouble for other businesses
– over a quarter of corporate insolvencies are
caused by another company’s insolvency.”
January 2014
8
Methodology
Research undertaken by BDRC Continental, an award-winning insight agency. Questions were put to
500 UK businesses via BDRC Continental’s monthly Business Opinion Omnibus. Telephone-based
interviews with a nationally representative sample of senior financial decision makers across the UK,
weighted by size, region and sector.
For more information, please contact Nick Cosgrove, R3 Communications Manager,
on [email protected] or 0207 566 4215
About R3:
R3 is the trade body for Insolvency Professionals, and is made up of 97% of the UK’s Insolvency
Practitioners.
R3 promotes best practice for professionals working with financially troubled individuals and
businesses; all R3 members are regulated by one of nine recognised professional bodies.
R3 stands for ‘Rescue, Recovery, and Renewal’ and is also known as the Association of Business
Recovery Professionals. Website www.r3.org.uk