South East: Number of 'zombie' businesses grows

The proportion of South East companies which are only paying the interest on their debts – one of the signs of a so-called ‘zombie’ business – has risen slightly to 4% in December from 1% in April 2017, according to indicative research by R3, the insolvency and restructuring trade body.

The level of businesses only paying interest on their debts is equivalent to 12,000 firms in the South East, and appears to buck the national trend, which saw the proportion of ‘zombie’ firms fall from 5% in April to 3% in December 2017.

R3’s research, based on interviews with 500 nationally representative businesses by research firm BDRC, also found that other signs of acute distress appear to have dropped to record or near-record lows.

Negligible numbers of South East companies report they are having to negotiate payment terms with creditors or are struggling to pay debts when they fall due, and just 1% say they would be unable to repay debts if there was a small increase in interest rates.

Mike Pavitt, chairman of R3's Southern Committee and partner and head of the corporate restructuring and insolvency group at Paris Smith in Southampton, said: “Although the wider economic picture isn’t a particularly optimistic one, fewer South East companies appear to be struggling to meet some key immediate financial obligations than in recent months.

“With the growth of alternative lending providers over the past five years, including peer-to-peer lending and growing private equity interest in distressed businesses, it has become easier for struggling firms to move out of immediate financial danger.

“Also feeding into this is economic uncertainty, which may be putting off businesses from investing or expanding. This frees up cash for paying down debt, albeit at the cost of long-term productivity improvements.”

Pavitt added: “A recent OECD report found the UK had the group’s best insolvency and restructuring framework for dealing with the ‘zombie’ business phenomenon, which has helped keep ‘zombie’ numbers lower in the UK than elsewhere.

“Whether this is the ‘end’ of the zombie business phenomenon is another question, though. Almost a decade on from the last recession, the proportion of zombie firms in the South East appears to be relatively low, but this doesn’t mean they’re gone for ever. Those businesses which have refinanced may not be any more productive and may have put problems off to a later date, while a serious financial downturn could easily create a new group of ‘zombie’ businesses.”