‘Zombie firms’ are a major drag, according to KPMG analysis

Kenny McKay, KPMG's head of restructuring in YorkshireKenny McKay, KPMG's head of restructuring in Yorkshire
Kenny McKay, KPMG's head of restructuring in Yorkshire
The rising prominence of so-called ‘zombie firms’ - companies under sustained financial strain - is threatening to cause a significant drag-effect on the UK economy, according to new analysis.

KPMG looked at the last three annual accounts of listed UK companies (FTSE and AIM) which revealed that eight per cent of UK companies currently display zombie-like symptoms.

But based on the latest data from 2018, and taking account of the recent increase in Bank of England interest rates, the share of zombie companies spanning the whole of UK plc could be as high as 14 per cent.

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The big four accountancy firm’s head of restructuring in Yorkshire, said the region’s zombies have been allowed to sleep walk largely undisturbed for the last decade but this environment is unlikely to persist indefinitely.

The study highlights the high risk of contagion for lenders exposed to the worst-affected industries.

In publicly traded accounts, it found that the highest concentration of zombie firms is in the energy (23 per cent), automotive (17 per cent) and utilities (15 per cent) sectors.

The fact that almost a quarter of energy businesses show zombie symptoms highlights the long investment horizon of the industry and is somewhat explained by the oil market only recently emerging from a significant downturn.

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The automotive and utilities sectors face substantial levels of disruption as incumbent industry leaders face fierce competition from new technologies, trends and innovative start-ups.

Kenny McKay, KPMG’s head of restructuring in Yorkshire, said: “The region’s zombies have been allowed to sleep walk largely undisturbed for the last decade, thanks to an extraordinary monetary and political environment, coupled with lenders exhibiting greater creditor forbearance to struggling companies in their portfolios. But this environment is unlikely to persist indefinitely.

“In the event of a liquidity squeeze, many of these underperforming businesses would fail – and if this happens, the potential for contagion is very real, creating broader challenges for an economy already struggling to deal with a plethora of issues.

“The good news is that prognosis doesn’t have to be terminal though acting sooner rather than later provides more options and can improve the chances of recovery. Urgent dialogue is required between regulators, banks and businesses in order to minimise the ongoing drag that these companies have on the economy, and to mitigate against potential risks in the event of an economic downturn.”

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“This has, and will continue to, create a drag on UK productivity, which continues to lag our peers in the G7 and much of Europe.”

Of the circa 21,000 private companies that KPMG analysed, 60 per cent display one or more of the symptoms associated with zombies, while just eight per cent display three or more. The worst affected industries are travel and leisure (12 per cent), real estate (11 per cent), financial services (10 per cent) and professional services (10 per cent).

KPMG said a number of wider-economic factors are causing this; travel and leisure businesses are being hit by reduced discretionary consumer spending appetite; retail landlords are finding income and asset value pressure due to the demise of high-street names; financial and professional services companies are being impacted by on-going economic uncertainty.

Yael Selfin, chief economist at KPMG in the UK, said: “The threat that zombie companies pose to the wider economy is very real, regardless of what the post-Brexit environment looks like. Many unproductive businesses have been able to stumble on in recent times, generating just enough profits to continue trading but without the innovation, dynamism or investment necessary to sustain bottom-line growth.”