Insolvency threat from UK’s ‘zombie’ businesses

Years of recession and financial crisis have turned almost one in ten of the UK’s 2.5 million companies into “zombies”, threatening a “surge of insolvencies” as they are left behind by the improving economy.

Picture: PA

In new report published today, financial health monitoring group Company Watch says the number of so-called zombie businesses has soared by 108 per cent in the last five years, to 227,000.

These companies, which are producing at best only enough cash to service their bank and supplier debts, have liabilities far in excess of their assets and yet collectively employ around 500,000 people.

Company Watch estimates that these businesses have a total negative net worth of about £70 billion, which it describes as “dead money languishing in unproductive businesses”.

In many cases desperate attempts to stay afloat – such as “suicide pricing”, in which a company sacrifices its profitability in an attempt to win work – are creating problems for healthy competitors.

Nick Hood, business risk analyst at Company Watch, said: “The problem with this ever-growing army of zombies goes well beyond any immediate threat of insolvency.

“These struggling businesses distort fair competition right across the economy as they underbid for contracts in their desperate ongoing battle to generate cash to keep their creditors at bay.

“The damage they cause to healthier companies can be seen especially in sectors like construction, where ‘suicide pricing’ is depressing the profitability of the entire industry.”

Construction is one of the worst affected sectors, with an estimated 26,000 zombie operators. There are a further 16,500 negatively valued property firms, as well as 15,500 hotels, clubs and pubs which are barely staying afloat.

The largest number of zombie firms are in the business services sector, where 65,000 firms are staggering on with little prospect of breaking even. There are a further 21,000 such firms in the media sector and 20,000 in retail.

The research shows that 63,000 British companies have negative equity of between £50,000 and £1 million, while nearly 3,500 are sitting on debts of £1m or more beyond the value of their assets. The figures come despite an improving picture for the UK economy, with industrial surveys showing all sectors have gained momentum since the start of the year.

Economists believe second-quarter GDP growth could be revised up from the current 0.7 per cent when the third official estimate is published on Thursday, while growth in the third quarter is predicted to be even higher.

But Hood said the recovery, and the looming prospect of rising interest rates it brings with it, will sound the death knell for many of the zombie firms.

He said: “The problem with the recent years of minimal growth in an extended period of low interest rates and depressed asset values is that the usual post-­recession process of clearing out the dead wood has been delayed.

“As the economy improves, a proportion of these businesses will be able to trade themselves into stronger positions. But when interest rates eventually rise and activity levels increase, the lack of financial resources of many others will cause a surge in insolvencies for the weak and rapidly rising bad debts for their banks and other creditors.”