Forget your SME’s and FTSE 100’s. The recession has created a new type company – Zombie companies, hiding in the darkness of the UK economy.
These are businesses that cannot generate sufficient funds to repay their debts and borrowings but manage to lurch from one crisis to the next through parent company hand outs, investors not yet willing to acknowledge the passing of their company and the goodwill of creditors. The Association of Business Recovery Professionals considers that there are 146,000 zombie companies in the UK equating to eight per cent of UK companies on the brink of insolvency. The problem is, no one can afford to see these companies fail. Creditors hope that they will get paid eventually, with a little bit of patience and banks can’t afford to write off huge chunks of their portfolio in circumstances where there is little chance of a purchaser finding funding to purchase the business out of Administration for a purchase price anywhere near the amount of money required to repay secured lending.
Meanwhile there are companies being strangled by their Final Salary Pension Schemes. Investment returns are stifling the growth of assets in schemes and trustees of schemes wish to reduce the risk to members of the company’s eventual demise by investing in less risky investments with little investment return. At the same time contributions that need to be made to the scheme increase in line with the decline in the business. So the company continues its business from day to day with the sole purpose of funding the scheme. Buying its way out of the scheme will cost money the company can’t afford, investors see no good reason to invest funds that will simply find their way into the black hole that is the pension deficit and trustees may have no power to wind up the pension scheme or consider that their members are better off letting the company struggle on, so long as the deficit in the scheme doesn’t worsen.
So how do you kill a Zombie? As the economy improves and funding becomes available for those with a keen eye for a bargain, the banks will feel more comfortable addressing this issue head on. With an upturn in business, creditors may feel strong enough to draw a line under their relationships with companies that don’t pay their bills or it may be possible to breathe life into the zombie such that it can regain the faith of its creditors.
If the Zombie isn’t too badly decomposed then maybe it can be saved but otherwise the fact may have to be faced that the undead have no place amongst the living.