By Daniel Hunter
The construction and real estate sector has topped the list for the area experiencing the worst effects of the downturn, according to KPMG’s second annual report on zombie companies or those which are either marginally profitable or loss-making and are accordingly unable to pay off their debt.
The study found that banks’ work out teams are most active in construction and real estate, and are predicting a hike in the numbers of formal insolvencies and increased activity in distressed M&A, possibly via ‘pre-pack’. Loan book sales are also expected to ramp up.
“While last year, the banks believed the biggest threat to zombie companies was a rise in interest rates, this year the banks believe the economic situation is now the biggest threat," Richard Fleming, UK Head of Restructuring at KPMG, commented.
"If worsening GDP figures weren’t evidence enough, our zombie company research shows urgent action is needed to stave off a worsening situation. With construction and real estate at the top of banks’ danger lists, the UK Guarantees scheme to boost infrastructure investment should be seen as an important step in the right direction.
“That said, the research also showed that while management was the single biggest reason for a company being placed into an insolvency procedure last year, this factor has only dropped to second place in this year’s findings. It is clear that supporting and improving the quality of company management is an important issue which must be weaved into the country’s growth agenda.”
Key findings from the zombie company research:
- The top four triggers which are most likely to tip a company in a bank’s work out department into insolvency are: running out of cash, management, bad debt and arrears due to HMRC;
- A debt compromise or financial restructuring were picked as the most likely solution to be applied to a zombie company over the next 12 months;
- 51% of respondents said it is harder to resolve a zombie company’s issues than it was a year ago;
- 71% said the cost of capital is affecting decision making;
- The sectors seeing the highest proportion of formal insolvency procedures (CVA, ‘pre-pack’ or trading administration) is the construction & real estate sector (compared to the retail and travel & leisure sectors last year);
- Pensions zombies are a key concern for banks, with 88% saying companies are not doing enough to address deficits and 87% expecting more compromises with the PPF.
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