Home Finance & Investments One in six regional firms could be a ‘zombie business’

One in six regional firms could be a ‘zombie business’

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Almost one in six regional firms is only able to pay the interest mounting up on its debts, rather than repaying any of the debt itself.

According to new research from insolvency and restructuring trade body R3, 16% of the businesses that it surveyed across the North East, North West, and Yorkshire and Humberside said they were not currently in a position to reduce the capital amount that they owed, with 6% saying they would be unable to pay their debts if there was a small interest rate rise.

Elsewhere in R3’s latest Business Distress Index, which looks at measures of business growth and distress across the UK, 17% of the regional firms surveyed said they were struggling to pay their debts when they fell due, while almost as many (16%) were having to negotiate payment terms with their creditors.

Only being able to pay the interest, rather than the original debt itself, is one potential sign of a so-called ‘zombie business’ – a company which is only surviving thanks to low interest rates, but which otherwise might not be viable.

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.

Andrew Haslam, chair of R3 in the North East and head of specialist business advisory firm FRP Advisory LLP’s Newcastle office, says:, says: “Tougher trading conditions and much uncertainty over the future of the economy have contributed to a significant chunk of regional businesses finding themselves stuck in ‘zombie business’ mode – they are capable of ticking along, but growth and increased productivity improvements are presently out of their reach.

“On the one hand, this means many businesses are stuck in a position where they’ll struggle to deal with external shocks, which would present a wider economic problem if they all were to become insolvent at the same time.

“On the other, you have a significant proportion of firms which are tying up investment and staff which could potentially be used by more productive companies elsewhere in the economy.”

Andrew Haslam believe the Government recently-announced plans to improve the UK’s business rescue and restructuring options could have a positive impact on this trend, while the UK’s insolvency and restructuring framework is already highly rated by the OECD for its ‘zombie-busting’ powers.

He continues: “Our members have reported that economic uncertainty is contributing to businesses treading water, with some building up stock to safeguard against future risks such as the UK leaving the EU without a deal at the end of March.

“Investing in the stockpile puts pressure on cashflow and investment in other areas, while large stockpiles will take time to turn back into cash and are at risk of obsolescence.

“Rising interest rates will have also contributed to businesses stumbling into ‘zombie business’ status.

“The future for these ‘zombie businesses’ is mixed. Some might eventually be able to restructure or find new investment, and then grow while others will run out of road and become insolvent. While this would mean capital could be ‘recycled’, it may also be something of an economic shock in itself.

“While they still need a lot of work, the Government’s insolvency reform proposals could give insolvency practitioners more tools to help turn around struggling companies, and boost productivity.”