Zombie companies threaten to cause new financial meltdown

31 October 2022 Consultancy.uk 3 min. read
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This Halloween, a study of the global economy suggests the world leaders should be preparing for an undead uprising. More specifically, according to researchers at Kearney, the number of ‘zombie companies’ in the retail sector is growing – and could infect the broader economy if steps are not taken soon.

The analysis has found an alarming rise of so-called ‘zombie companies’ in the UK. Defined by the OECD as companies that can’t cover the interest on their borrowing from operating profit for three years in a row, the number of zombie companies in the UK grew by 10% in 2022.

Speaking on ‘the walking debt’, Nils Kuhlwein von Rathenow, Partner at Kearney, commented, “Over the past year, it’s become clear that rising energy and raw material costs, strained supply chains and staff shortages are weighing on companies’ revenues, with financing problems compounding the problem for many. However, only a few firms with unsustainable business models actually exit the markets due to insolvency, and every year more and more become ‘zombie’ businesses, in part thanks to easy access to capital. But as interest rates rise, this will become even more unsustainable, potentially increasing the number of zombie entities by nearly 40% again."

Zombie companies threaten to cause new financial meltdown

The situation is severe around the world, too. Kearney’s research encompassed 4.5 million records of some 70,000 listed companies from 154 industries and 152 countries, and also found worrying signs that the shambling horde of undead firms could cause a crash similar to the 2008-2009 financial meltdown. The number of zombie companies now accounts for 5% of all firms globally – accounting for nearly $400 billion in debt. That is also potentially the tip of the iceberg; a larger number of midmarket companies are not listed on the stock exchange and are therefore not included in these figures, but could also fit the definition of a ‘zombie company’.

Of all the industries studied, the real estate sector had the highest percentage of zombie firms globally. Around 9% of real estate developers and 11% of diversified real estate companies were afflicted with apparent ‘zombism’. Worse, if interest rates continue to rise relative to 2021, the number of infected firms will grow too. In that case, up to 15% of companies in the real estate sector will be zombified – or one in seven listed companies in this sector. This means that, as in the years before the financial crash of 2008-2009, the real estate sector once again poses a considerable risk to the global economy. 

Christian Feldmann, Partner at Kearney, added, "One in seven listed companies in the global real estate sector is at risk of being classified as a zombie company, ominously mirroring the years before the financial crisis of 2008/2009. As a whole, we’re seeing around $500 billion misallocated by these zombie businesses, leaving them at significant risk of default. Against this backdrop, both institutional and private investors, legislators and capital market regulators are challenged by efficiently allocating capital in a timely manner, avoiding the risk of zombie firms, and equipping insolvency laws to ensure that ‘sick’ companies exit the market in a timely manner. The figures are clear, we need action now.”