What has the pandemic meant for zombie businesses?

21 May 2021

The Covid pandemic has altered much of the UK’s – and the world’s – business environment out of all previous recognition. But one pre-pandemic phenomenon, that of the so-called ‘zombie’ business, has been brought into sharp focus, amidst fears that the conditions created by the Government’s response to the economic crisis has greatly increased the number of them.

Two recent thinktank reports, from the Resolution Foundation and Onward, have set out the need for policy-makers to beware the creation of a new wave of zombie companies, with the latter estimating that over a fifth of UK firms (21%) now count as zombies.

Zombie companies: necessary or not?

A zombie company can be defined in several ways; most commonly, it is a company which only generates enough money to pay the interest on its debts, not the debts themselves. The term has been around for many years, but the decade-plus of low interest rates which followed the financial crash of 2007-08 stoked fears about a wave of zombie companies, which were only viable thanks to a base rate which has stayed just above zero.

Zombie businesses are often linked to lower levels of productivity within an economy, as they do not have the available capital to invest in new operations, products, or services, while the investment tied up in them is denied to other, nimbler companies. They are almost always talked about in negative terms, and discussed as a problem by economic bodies such as the OECD.

However, it is important to remember that, while estimates as to the number of zombie companies vary, they certainly make up a substantial proportion of UK firms, employing many people and producing goods and services which are purchased and relied upon by their peers. In the ongoing debate around zombie companies, we should not lose sight of the place they hold in the economy.

Zombies and COVID support

The vast scale of the financial support extended to companies in the immediate wake of the Covid pandemic – over £75 billion just from the CBILS/CLBILS/Bounce Back Loan schemes alone, to say nothing of the furlough scheme and the various pauses on creditor enforcement actions – has renewed concerns among economic commentators that zombie companies have been able to keep themselves going by accessing the schemes on offer.

The support from the Government was introduced at speed, with all other concerns secondary to the need to get the money ‘out the door’ as soon as possible, to stave off a mass wave of collapses. Whatever the merits or otherwise of sacrificing sustainability checks on companies accessing support schemes in favour of getting the necessary funds to companies as rapidly as possible, the Government’s aim of helping companies make it through the emergency period of the pandemic was surely fulfilled, and a tidal wave of corporate insolvencies was averted.

That may seem like a strong statement, but as our past research has found, even healthy companies are often negatively affected by the insolvency of a customer, supplier, or debtor, so preventing a ‘domino effect’ of shockwaves through the economy at a time when ‘business as usual’ felt impossibly far away was eminently justifiable.

Given the high estimated numbers of zombie companies in the UK, it is inevitable that they will be deeply embedded in supply chains, with other companies reliant in turn on their products and services. Their survival during the pandemic has doubtless helped keep their trading partners afloat, underlining the role they play in the business ecosystem – despite their detractors’ views on their usefulness.

What will happen to zombie companies post-pandemic?

It remains to be seen how long the companies which were ‘zombified’ as a result of the debt they took on to tackle the turmoil of the past 12 months will survive; as we saw following the Global Financial Crisis, the answer could be at least a decade.

Our members have reported anecdotally that they had seen instances where companies which in normal times would have been close to entering an insolvency process were able to sustain themselves thanks to the various support schemes on offer to companies as part of the Government’s response to the pandemic. Additionally, many companies which were trading profitably prior to Covid may have – through no fault of their own – become zombie companies in a technical sense, due to their newly taken on debt burdens.

What is certain is that the insolvency and restructuring profession will have an important role to play in their future, by breathing new life into debt-bound companies through restructuring, by advising directors on how to become more productive and shed their ‘zombie’ tag, or by, in the final instance, recovering the assets of zombie companies which become insolvent, so they can be returned to creditors and re-invested in new ventures.

In the meantime, with the economy predicted to spring back strongly this year in the UK as efforts to tackle Covid finally bear fruit, and as we collectively adapt to a post-pandemic economic landscape, there will be many opportunities for companies – even zombies, potentially – to reinvent themselves, which will ultimately benefit the business community and the country as a whole.