In my business of debt collection, I talk to a lot of people. And owners and managers of small- and medium-sized business are telling me they are not convinced by the official statistics showing that the UK economy is in recovery.
There is, appropriately enough in this season of witches and werewolves and things that go bump in the night, a fear of what even a small rise in interest rates will mean for the thousands of ‘zombie’ companies that have traded through the recession – but cannot trade their way out of debt.
This army of the undead has been growing for the past few years as the Bank of England kept interest rates low and lenders saw no value in driving struggling companies to the wall.
How many companies and how much they owe depends on how you define a zombie company.
Negative equity
According to surveys of business owners by R3, the insolvency industry’s trade body, 497,000 people work for zombie companies and 1.3 million for businesses showing signs of acute distress. R3’s zombie count of businesses able to pay only the interest on their debt has fallen, to just over 100,000 from a peak of about 160,000 in November 2012, Reuters reported in September.
Another count, commissioned from corporate watchdog Company Watch by Reuters, identified more than 227,000 companies that are in negative equity. Company Watch analysed the accounts of all business registered in Britain to calculate the numbers in this position – a technical measure of insolvency equivalent to the position of homeowners whose mortgage debt exceeds the value of their property.
Nick Hood of Company Watch, writing in CCR Magazine, put the zombie army’s net liabilities of £70 billion in context. He said: ‘This unproductive money wallowing in entrepreneurial limbo is greater than the government’s education budget, three times the defence budget and almost two-thirds of the health budget.’
The worst hit sectors are construction, the media and retailing. Hood said the zombie companies distort competition in their desperation to win business and generate cashflow. ‘The construction sector is a prime example, where this phenomenon underlies endemic suicide pricing, which is decimating the profits of the whole industry.’
While official statistics now point to a recovery in all sectors of the economy, activity is still below levels recorded before the recession took hold. The evidence of previous recoveries, suggests Hood, is that company failure rates will peak about a year after sustained growth returns.
Writing in the same October edition of CCR Magazine, Liz Bingham, the president of R3, notes that small businesses in particular do not agree with the chancellor, George Osborne, that the economy has moved ‘from rescue to recovery’.
Measured in R3’s Business Distress Index, 51% of small businesses take issue with the chancellor while 55% of large firms back his assessment and only 35% disagree.
Oddly, she points out, there is a mismatch between business optimism about the economy and their own prospects. While more than half of businesses are optimistic about the big picture, fewer believe their own activity will increase over the next year.
Gloomier still is a third zombie count, that by insolvency practitioner Begbie Traynor, reported by the Financial Times in October. Its estimate that there are 432,082 zombie companies is extrapolated from the numbers on ‘red alert’ under its credit scoring system.
Julie Palmer, a partner of Begbies Traynor, told the FT that as unemployment rates fall, ‘under Bank of England rules interest rates could rise as early as 2014. Even if they go up by only 0.5 per cent, insolvencies could increase sharply.’
If that’s the case, and recovery does kill off some of the UK’s weakest companies, unemployment might well get worse before it gets better. However, this may allow the Bank to keep interest rates lower for longer. It’s the fine calculation that governor Mark Carney and the Monetary Policy Committee, which decides interest rates, must make when they meet each month
The role of the collections industry will be to help clear up the debris left by any corporate bloodbath. SJ Collections can help with credit control, debt recovery and the business wisdom that comes with years of experience.
