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
June 2013
Introduction
Commentators have been quick to seize on the
‘zombie’ buzzword, and R3 has tracked four
signs of struggling businesses over the past year.
While the number of ‘zombie businesses’, those
servicing their interest alone, has dropped over
the past year (to just over 100,000, from a peak
of 160,000 in November 2012), more and more
businesses are displaying even more acute signs
of distress.
Today there are over 200,000 businesses that
are either negotiating with their creditors or
struggling to pay debts when they fall due. This
group is more troubling than the cadre of ‘zombie
business’ that has built up – being unable to pay
debts when they fall due is a technical definition
of insolvency.
R3
The ‘zombie businesses’ phenomenon: An update
For these businesses, the day of sink or swim
could be close.
As the trade body for the UK’s insolvency
practitioners, R3 is well placed to observe this
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
June 2013
2
What signs has R3 been tracking?
For the purposes of our research, R3 asked
business owners whether they were experiencing
any of the following:
• Just paying the interest on debts (and not the
debt itself)
• Unable to repay debts if interest rates increase
by a small amount
• Having to negotiate payment terms with
creditors
• Struggling to pay debts when they fall due
How many ‘zombie businesses’
are there?
Although the number of ‘zombie businesses’ in
the UK fell over the past year – the number of
businesses only paying interest on their debts
dropped 26% from June 2012 to May 2013
– the improvement on this score has been
overshadowed by an alarming jump in the
number of businesses displaying even worse
signs of business distress.
Figure 1 - Number of businesses reporting signs of business distress
R3
The ‘zombie businesses’ phenomenon: An update
June 2013
3
Jun-12
Nov-12
Feb-13
May-13
Having to negotiate payment terms with
creditors
130,000
75,000
74,000
137,000
Unable to repay debts if small increases
in interest rates
145,000
91,000
47,000
69,000
Struggling to pay debts when they fall
due
110,000
111,000
101,000
134,000
Just paying interest on debts
146,000
160,000
135,000
108,000
The latest R3 business tracker shows the
number of businesses with very serious cashflow
problems is higher now than a year ago.
Businesses struggling to pay debts when the fall
due – a technical definition of insolvency – and
businesses negotiating payment terms with
their creditors increased by 24,000 and 7,000
respectively over the last 12 months.
Since the last tracker three months ago, the
jump is even more pronounced: 33,000 more
businesses are struggling to pay debts when
due; 63,000 more businesses are negotiating
with their creditors.
Negotiating payment terms with creditors is
now the most common problem cited by UK
businesses in this tracker. In fact, this group,
all 137,000 of them, represents 8% of all UK
businesses. Indeed, over 200,000 UK businesses
are now either struggling to pay their debts or
having to negotiate with their creditors.
R3
The ‘zombie businesses’ phenomenon: An update
Liz Bingham, R3 President, comments:
“These businesses are in a very perilous position.
While they have yet to enter formal insolvency
procedures, businesses with such serious
cashflow problems may find that the day of
reckoning is not too far off. In this situation,
businesses will struggle to access new bank
lending or credit facilities.
“Fewer businesses may be reporting only paying
interest on their debts, but this is not necessarily
because they are returning to the land of the
living; far bigger problems are occupying their
thoughts. The ‘zombie businesses’ may be
shuffling towards far more dangerous territory.
“Negotiating terms with creditors could be seen
as a proactive step to stave off insolvency, but it
may only store up problems for later.”
“Negotiating terms with
creditors could be seen as
a proactive step to stave off
insolvency, but it may only
store up problems for later.”
June 2013
4
Have we had ‘zombie businesses’ before?
Corporate insolvencies tend to peak in the
years after a recession as struggling businesses
finally begin to fail. Businesses often also find
it difficult to cope adapting to the stresses of
expansion and increased demand that economic
recovery brings. This insolvency ‘lag’ was seen
in the 1970s, after the early 80s recession, and
after the early 90s recession; but not, curiously,
following the latest recessions.
During 2011, roughly two years after the end
of the recent recession, the liquidation rate
never rose above 0.8% in any one quarter. By
comparison, in 1993, two years after the end of
the early 90s recession, the liquidation rate hit
2.6%. In fact, insolvencies peaked during the
recent double-dip recession and have continued
to fall ever since.
In previous recessions, struggling businesses
never really had the chance to become ‘zombie
businesses’. This time around, benefitting from
an extended period of cheap credit and from a
wide range of government support schemes,
struggling businesses have been able to stumble
on a little longer.
However, with the number of businesses
reporting severe cashflow problems on the rise,
the long-awaited insolvency ‘lag’ from the last
recession may arrive soon enough.
Figure 2 - UK corporate liquidations since 1960 (approximate recessions in red)
R3
The ‘zombie businesses’ phenomenon: An update
June 2013
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What next?
Not all ‘zombie businesses’ are doomed to
failure. The prolonged period of low interest
rates and government support for businesses,
such as the Time to Pay scheme, have made
it hard to distinguish between businesses that
are struggling but viable and those businesses
that do not have a future.
With the climb in the number of businesses
with potentially terminal cashflow problems –
and with the economy finally showing signs
of a sustained recovery – the time is fast
approaching for lenders, whether it’s suppliers
or banks, to decide which businesses to
continue to support and which to let go.
Liz Bingham says: “Supporting businesses
through rock bottom interest rates and
generous support schemes will only ever work
for so long. A fundamentally unviable business
will always be an unviable business in the longterm. It’s crunch time for businesses as lenders
make their minds up.
“Some businesses will see this situation as
a wake-up call and will make the necessary
changes to survive in the long-term. For the
rest, it’s a different story.
“The potential impact of a business clear-out
remains to be seen. The ‘zombie business’
theory assumes that keeping capital and
talent tied up in ultimately unviable businesses
crowds out others.
“However, the long-delayed failure of struggling
businesses will also cause a short-term
jump in unemployment, and could hurt other
businesses too.”
R3
The ‘zombie businesses’ phenomenon: An update
In 2009, R3 research found that over a quarter
of corporate insolvencies were caused by
another company’s insolvency – the insolvency
‘domino’ effect.
Liz Bingham adds: “The challenge for policy
makers is to find ways to limit the ripples from
large numbers of corporate insolvencies. An
orderly wind-down of failing businesses is
what’s needed.
“As ever, I would urge businesses to be
proactive in dealing with financial difficulties
either present or on the horizon. Seeking advice
at the earliest possible stage from professionals
who are able to help them tackle their
fundamental issues gives businesses the best
possible chance of survival and a profitable
future.”
June 2013
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Methodology
R3 surveyed (using market research agency
BDRC continental) 500 business owners or
FDs with a turnover of £50K+. According to the
Department for Business Innovation and Skills
there are currently 1.73 million such businesses
in the UK. Results were then weighted according
to the make-up of the business population to
enable them to be extrapolated. Fieldwork dates,
first survey 6th-13th June 2012 and most recent
7th-17th May 2013.
R3
The ‘zombie businesses’ phenomenon: An update
June 2013
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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