- ‘Pre-pack’ administrations expected to rise in response
- Zombie survival on an economic knife edge
- Management take the rap for insolvency
‘Zombie’ companies – businesses with low or no profitability which are accordingly unable to generate sufficient cash flow to repay borrowings – are an increasing problem, according to latest research from KPMG. The research, which surveyed around 400 ‘work out’ bankers*, also shows that finding an acceptable solution to such zombie cases is taking longer than two years’ ago.
Zombies are increasingly likely to agree a debt compromise with their lenders or go through a ‘pre-pack’ administration process compared with three years ago and, moreover, 80% of banks expect to see the increased use of ‘pre-packs’ to resolve zombie company issues.
“Zombie businesses are stuck in a kind of corporate purgatory, unable to live and unable to restructure and move on. Companies generating marginal profits or losses, together with an inability to generate sufficient cash to pay down borrowings, are treading water in terms of meeting their debt obligations; they are the corporate equivalent of a person who is on a salary freeze and is paying a large interest-only mortgage. These businesses are unable to raise fresh working capital or refinance and are highly vulnerable to any negative economic factors. Indeed our findings show that an interest rate rise is the most dangerous threat to their survival.
“When asked about the factors which trigger formal insolvency of a zombie company, work out bankers suggested that a breakdown in the relationship with management or a weak management team were the most significant factors. At the same time the banks we spoke to are also expecting to see a rise in the use of ‘pre-packs’ to restructure zombies. However, it should be highlighted that the most common solution to a zombie situation is currently a debt compromise; both banks and companies are sharing the pain.”
According to the lenders, 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;
The most common form of bank ‘work out’ is a debt compromise followed by a turnaround (fundamental business change generating a return to profitability) and, in third place, a ‘pre-pack’ administration;
Two years’ ago, a zombie company would typically sit in a bank’s ‘work out’ department for between 6-12 months - this period has now extended to 12-18 months;
According to the lenders surveyed, management issues are the single biggest reason for a company being placed into a formal insolvency procedure (followed by running out of cash and losses);
Zombie businesses are largely in the SME group with nearly half of zombies having a turnover of £3-20m;
The sectors seeing the highest proportion of formal insolvency procedures (either CVA or ‘pre-pack’) are the retail and travel & leisure sectors.
Fleming went on to say:
“Looking at the industry sectors with the greatest proliferation of zombie cases resolved using formal insolvency procedures - either a CVA or a ‘pre-pack’ - the banks we spoke to pointed to the retail and the travel & leisure sectors. The findings suggest that the recent wave of retail insolvency appointments looks set to continue as the high street bows under the pressures of fundamental shifts in consumer behaviour and depressed discretionary spend.
“We are already seeing pain in the leisure sector and the causal negative factors echo those of the retail sector; while zombie companies are in their highest concentration in the SME group, we are seeing even the largest leisure companies struggle with business models which are becoming dated as buying behaviour changes and consumer confidence drops. Banks are finding refinancing even more difficult than two years’ ago – despite the UK now officially being out of recession – so the likely outcome for these businesses are compromises on debt at the larger end of the market and the use of formal insolvency mechanisms, ‘pre-packs’ and CVAs, at the smaller end.”
Notes to editors:
For press queries on the administration, please contact
Sorrelle Cooper, Senior PR Manager at KPMG: 020 7694 8527 / 07932 078218
KPMG Press Office: 020 7694 8773
About the research
*KPMG surveyed approximately 400 bankers who work with companies in distress, commonly known as ‘work out’ bankers - to establish their awareness of the ‘zombie’ company issue and drill down into the key problems raised by zombie companies. A copy of the report is available at www.kpmg.co.uk.
KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with nearly 11,000 partners and staff. The UK firm recorded a turnover of £1.6 billion in the year ended September 2010. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 150 countries and have more than 138,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. KPMG International provides no client services.