Interest spikes risk rise of zombie companies in energy sector

New research suggests that the number of so-called ‘zombie companies’ has risen across the global economy. The study shows that there has been a 5% increase in companies unable to meet interest obligations with operating profit for three years running.

According to a 2022 study from Kearney, 5% of the global economy was made up of zombie companies. 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 has grown again in the following year, so that that portion now stands at around 5.25%.

The 5% spread of undead companies might be seen as progress by some. The UK alone saw an increase in the number of zombie firms of 10% in Kearney’s 2022 paper. At the same time, some of the most vulnerable sectors of the economy have seen notable returns to health in the latest edition.

According to Kearney, the number of companies unable to meet their interest obligations fell by 3.4%. At the same time, the electricity supplier segment saw the number of zombie operators decline by 45%. This is partly after a major correction saw a spiralling number of undead firms finally go out of business. But it is also because global supply chain disruption resulting from the Ukraine-Russia war saw soaring energy prices – which actually served as a bailout for many operators.

Nils Kuhlwein, head of service line restructuring at Kearney, commented, “It is unsurprising, but welcome, to see that the energy and utilities industry is one of the few industries where the number of resurrections exceeds the number of new zombie firms. However, affected companies should be concerned by the potential impact of future interest rate rises, and use the breathing space provided by higher profits to ensure they are able to service their debt obligations over the longer-term.” 

At the same time, the wider economy is far from out of the woods, when it comes to the rise of the zombie firm. Kearney analysed a dataset dating back to 2,000 with more than 5 million data points on more than 70,000 global companies across 180 industries and 153 countries, including 41,400 companies active in 2022 – and discovered that many would be heavily exposed in the event of further interest rate increases.

According to Kearney, the energy sector is also an example of how industries could be prone to a significant rise in the proportion of zombie companies. If interest rates were to increase by a factor of 1.5% over 2023, Kearney asserted the share of zombies would grow to 4.3% of the energy industry, while an increase by a factor of 2% would result in a further rise to 4.5%. This indicates a substantial increase of nearly 50% compared to the industry’s baseline. 

So far, interest rates set by the Bank of England in 2023 have spiked from 3.5% to 5.25%. This 1.25% increase suggests there may already be a significant number of firms within the national energy sector slipping into Kearney’s dreaded zombie diagnosis – though this won’t be reflected by the firm’s research for another year.

Benedikt Frank, partner for energy and process industries at Kearney, added, “The health of the energy and utilities industry is central to the broader health of the European and global economy. The stress tests carried out by Kearney should therefore be a wake-up call to business leaders in this industry, who need to ensure their organisations are resilient enough to withstand interest rates rising beyond their current levels.”