Businesses with low or no profitability and which are unable to generate sufficient cash flow to repay borrowings – are keeping some lenders awake at night.
The research, which surveyed around 200 of New Zealand’s bankers, shows that while zombie companies are not dominating lenders’ perspectives across the board, they are a polarising phenomenon which is haunting a significant number of debt providers.
All the evidence points to a hardening approach going forward; it is likely that as banks become less busy dealing with the immediate fallout from the GFC, there will be less tolerance of businesses that are simply treading water.
However, these are real businesses that carry the fate of people's livelihoods and well being with them. Hence all stakeholders (owners, lenders, suppliers, NZ Inc) have a duty to ensure thay are responsibly managed.
Could this be the evolution of a 'new norm', which businesses in New Zealand should be aware of? There is a recognition within the banking community that they themselves need to be more aggressive in encouraging their customers to seek specialist restructuring advice early.
If businesses continue to ignore the symptoms they could find themselves increasingly at risk of being corralled into processes and losing control of their own destiny.
The survey highlights that zombies are more likely to go through turnaround situations, voluntary sales and refinancing which are already the most common ‘exit route’ for lenders. However, in a cautionary note receiverships, liquidations and even administrations are also expected to increase compared with 12 months ago.
While not as common an exit route as more solvent situations, receiverships are expected to be the biggest overall growth area as an exit route for lenders.
Working together to find a solution
While lenders highlight that they and advisers should be more proactive in helping zombies, experience has shown that the earlier all stakeholders work together to find a solution, the better for the lender, and all concerned.
At a personal level, being freed from the stresses and anxiety of a zombie existence can breathe new life into shareholders, entrepreneurs, management teams, employees as well as customers and suppliers.
Taking a macro perspective, you could view zombies as sucking the life out of healthy businesses as they often compete by undercutting competitors.
Whatever your view – macro or personal – active nurturing of zombies back to health or to a cathartic wind up will benefit all stakeholders.
Other key findings
- Lenders say that the top three threats to the survival of zombies are an increase in interest rates, negative economic factors and an increase in working capital requirements.
- However, they do not see regulatory change or public sector spending as important influencers when it comes to zombie businesses.
- The refinancing market has softened from its worst position two years ago, and the improvement is expected to continue, albeit lenders don’t expect to return to pre-GFC style lending over the medium term.
- Two years ago, a zombie company would typically sit in a bank's 'work out' department for between 12 to24 months; this period has now reduced to 6 to18 months.
- According to the lenders surveyed, management issues are the single biggest reason for a zombie company being placed into a formal insolvency procedure (followed by losses and running out of cash).
- Zombie businesses are largely in the SME group with well over half of zombies having turnover of $3-20 million, with a lack of available credit felt far more acutely than in larger zombie businesses.
- The sectors seeing the highest proportion of formal insolvency procedures are the construction, retail and financial services sectors.
- Most lenders (63%) do not feel that their customers are getting the right help from the appropriate specialist advisers.
- According to the lenders, the zombie problem isn’t going to go away any time soon.