One in six Yorkshire companies could be a ‘zombie business’
One in six (16%) companies in Yorkshire and the Humber is just paying the interest on its debts, rather than repaying the debt itself, according to new research from insolvency and restructuring trade body R3. This compares to 11% across the UK.
Only being able to pay the interest, not the original debt itself, is one potential sign of a so-called ‘zombie business’ – a company which is only surviving thanks to low interest rates but which otherwise might not be viable.
Zombie businesses are often linked to lower levels of productivity within an economy, as they do not have the available capital to invest in new operations, products, or services, while the investment tied up in them is denied to other, nimbler companies.
R3’s research, based on a survey of 1,200 companies by research firm BVA BDRC, also found that other signs of acute business struggles are relatively widespread. In Yorkshire, 9% of businesses are having to negotiate payment terms with creditors (16% nationally); 18% are struggling to pay their debts when they fall due, compared with 12% across the UK; and 7% regionally would be unable to repay their debts if interest rates were to increase by a small amount (8% UK-wide).
Eleanor Temple, chair of R3 in Yorkshire and a barrister at Kings Chambers in Leeds, says: “Tougher trading conditions and much uncertainty over the future of the economy have contributed to a significant chunk of UK businesses finding themselves stuck in ‘zombie business’ mode.
“These businesses are capable of ticking along, but growth and increased productivity improvements are out of their reach for the time being. On the one hand, this means thousands of businesses are stuck in a position where they’ll struggle to deal with external shocks. This presents a problem if they all were to become insolvent at the same time. On the other hand, you have a significant proportion of businesses which are tying up investment and staff which could be used by more productive companies elsewhere in the economy.”
Eleanor Temple adds: “R3 members have reported that economic uncertainty is contributing to businesses treading water, with some building up stock to safeguard against future risks – such as the UK leaving the EU without a deal next March. Investing in the stockpile puts pressure on cashflow and investment in other areas, while large stockpiles will take time to turn back into cash and are at risk of obsolescence.
“Rising interest rates will have also contributed to businesses stumbling into ‘zombie business’ status.
“The future for these ‘zombie businesses’ is mixed. Some might eventually be able to restructure or find new investment, and grow. Others will run out of road and become insolvent. While this would mean capital could be ‘recycled’, it may also be a bit of an economic shock in itself.”
Positively, the UK’s insolvency and restructuring framework is highly rated by the OECD for its zombie-busting powers, and the Government recently announced plans to improve the UK’s business rescue and restructuring options.
She adds: “While they still need a lot of work, the Government’s insolvency reform proposals could give insolvency practitioners more tools to help turn around struggling companies, and boost productivity.”
Other business distress signs slightly higher
R3 also tracks more general signs of business distress, and has detected an increase in these signs from earlier in the year.
Three quarters (76%) of businesses in Yorkshire (up from 53% in April 2018) reported that they have recently experienced at least one of the following: being owed payment on invoices that are over 30 days past due (27%), a reduction in sales volumes (19%), having had to make redundancies (16%), decreased profits (11%), a recent fall in market share (10%), or regularly using the maximum overdraft facility (10%). Nationally, only 60% of businesses experienced at least one of these signs of distress in the most recent research.
However signs of growth tracked by R3 have also increased in the region from April. Three quarters (76%) of businesses (up from 59% in April) said they had seen at least one of the following signs of growth: an increase in sales volumes (33%), investing in new equipment (25%), increased profits (21%), market share has recently grown (11%), or the business is expanding, i.e. geographically, increasing staff numbers or new areas of business (9%). The regional performance is more robust than the national picture which saw 67% of businesses experiencing at least one of these signs of growth.
Eleanor Temple comments: “It’s worrying that business distress signs are continuing to increase. With uncertainty coming at them from several vectors, businesses need to stay on their toes and ensure they’re in shape to meet the future demands of the market, and customers’ ever-higher expectations.
“Any business can be blind-sided by a sudden change in its operating environment; longer-term and more gradual changes must also be monitored carefully, to avoid the risk of stagnation. In a distress scenario, the perspective of a third-party advisor can be invaluable for helping directors determine the best way forward.”