Have the ‘zombies’ been killed off?

Victory against the 'zombies'?

The percentage of Midlands companies only paying the interest on their debts – one of the key signs of a so-called ‘zombie’ business – dropped to 2% in December 2017 from 12% in April, according to figures from the local branch of R3, the insolvency and restructuring trade body.

The statistics, which form part of a long-running survey of business distress by R3 and BDRC, point to an estimated decrease of around 57,000 zombie companies in the Midlands, indicating a fall larger than in either the north or south of the UK.

The R3 report also suggests that other signs of acute distress among Midlands businesses have dropped to record or near-record lows.

Just 2% of Midlands companies surveyed report that they are having to negotiate payment terms with creditors, or are struggling to pay debts when they fall due. Only 3% say they would be unable to repay debts if there were a small increase in interest rates.

R3 Midlands chairman Chris Radford, a partner at Gateley plc in Nottingham, said: “The fall in businesses only paying the interest on debts comes despite the first rise in UK interest rates in a decade. However, it may be that November’s modest rate rise concentrated directors’ minds and, with the prospect of further rises in the near future, prompted businesses to deleverage or refinance to avoid future struggles.

“An additional factor could be that, with corporate insolvencies edging upwards over the last 18 months, some of those companies struggling previously have ceased to trade or gone through a rescue process. A recent OECD report found the UK had the group’s best insolvency and restructuring framework for dealing with the ‘zombie’ business phenomenon, which has helped keep ‘zombie’ numbers lower in the UK than elsewhere.

“The downward trend in zombie businesses does not mean, however, that they will completely disappear. Those companies which have refinanced may not be any more productive and may have put problems off for a later date, while a serious financial downturn could easily create a new group of ‘zombies’.”