UK Zombie companies – how serious is the problem?
June 29, 2022
Whilst many know what Zombie companies are, how they are created and why they are a problem for both the economy generally and can be for their Directors. In this article, we look deeper into the problem. How many UK Zombie companies are there and what are the financial parameters of this phenomenon?
The size of the UK Zombie company problem
We used the Company Watch data analytics system to interrogate the latest accounts of every UK-registered company and limited liability partnership filed at Companies House. Our criteria for identifying Zombies was those, which had total liabilities greater than their total assets by a de minimis limit of £20k. We believe that this is the most appropriate measure for all sizes of entities, taking into account the limited financial information available for many smaller companies.
Our search found 257,150 Zombie companies currently fit this criteria, equivalent to just under 6% of all active companies on the Companies House register.
This means that one in 16 of all UK companies have negative balance sheets to the tune of at least £20k. This compares with 234,718 Zombies when we last carried out this research just nine months ago in September 2021, an increase of 10% in those few short but challenging months.
Related article: Zombie companies are on the rise
How much capital is tied up in these Zombie companies?
The Zombie army has total assets of £450bn, representing resources tied up in potentially unviable and less productive businesses.
This can be set in the context of total UK GDP of some £2.2tn.
How big is their combined negative net worth?
Between them, UK Zombie companies have liabilities (not including contingent liabilities not shown in their balance sheets) which exceed their total assets by £299bn.
This is the potential loss to the creditor community should they all fail.
How much do they borrow?
The total borrowings of the UK Zombies stands currently at £913bn.
This is lending capacity committed to underperforming companies, which could otherwise be used to stimulate business investment, drive growth and improve the UK’s poor productivity levels. The overall gross gearing is 203%. It is well over 100% in every UK region, except the East Midlands.
Do all Zombie companies fail?
Unlike in horror movies, the good news is that not all Zombies end up with a stake through their commercial hearts. Research in 2020 by the London School of Economics (LSE) showed that around one-third of zombies are in fact growing businesses at an early stage of development. It also revealed that Zombie status can be a temporary phase from which two thirds recover eventually to become healthy enterprises.
Where are most Zombie companies based?
Given that some of the largest negative financial positions we found are in private equity-owned companies, it is unsurprising that by far the greatest concentration of Zombie companies is in London, where most venture capital activity is based. 30% (77,481) of all Zombies are there.
The next highest volume is in the South East, reflecting the heavy bias of UK economic activity in favour of the South of the UK. Here there are another 25% (63,821) of the Zombie army.
The third highest region is the North West with 8.1% (20,889), then the South West (6.7% – 17,136) and the West Midlands (6.7% – 17,099). Scotland has 4.5% (11,598), while the figures for Wales are 2.6% (6,777).
Related report: Financier Worldwide Report – What next for UK zombie companies?
What are the prospects for UK Zombie companies?
The LSE research shows that a high proportion of Zombies will survive and may go on to thrive. The issue lies with the one third that do not. Many of these will simply stumble on with the indulgence of their lenders and creditors. Those that do fail will not all collapse at once.
Impact from interest rates
Nevertheless, a key element in facilitating Zombie survival is low interest rates. After the Bank of England raised rates in June 2022 for the fifth time in seven months, the trend is clearly upward, amid speculation of how high rates will have to go to curb rampant inflation.
Impact from economic change
Another important requisite for the preservation of Zombies is a healthy, growing economy. Most economists now believe that the UK is in recession, while the latest OECD prediction is that UK GDP growth will be flat at best in 2023.
It is hardly surprising that the major trade insurer, Atradius forecast in May 2022 that UK corporate insolvencies would double in 2022 to some 23,000. Many of these will be casualties from the ranks of the Zombie army.
Concerned about these issues or overall creditor or supply chain risk?
If you are concerned that you business is or could be affected by these issues or if you have significant credit or supply chain risk with a company with a negative balance sheet, Opus is here to advise and help you. We have extensive experience of identifying and implementing positive solutions in these scenarios.