What will expunge the curse of the walking dead?
“Zombie companies” is a media term for companies that need constant bail-outs to continue functioning; indebted companies that in the main generate only enough cash to pay interest on loans, not enough to reduce them.
The question then is what is their reason for being? These zombie companies have no life or future and more than often have insufficient funding and increasing creditor obligations, particularly to employees.
Such companies are the walking dead, retarding healthy companies’ contributions to economic growth, and currently proliferating in a climate of record low interest rates.
Company Watch reports the tripling of zombie businesses in the UK to almost 340,000 in the past six years and anecdotal evidence indicates the situation could be far worse elsewhere in Europe, the US, China and Japan.
While it’s true Australia weathered the Global Financial Crisis (GFC) better than most countries, the curse of the zombies is nonetheless having a debilitating effect here.
Trouble is, so many corporate zombies exist unrecognised, and there’s no apparent sign in Australia of widespread acceptance of a Japanese financier’s proposition that “companies failing to make a profit in a decade, shouldn’t be in business”.
Accordingly the Federal Government and Australia’s business community are a very long way from devising mechanisms to expunge this curse.
Are your clients among the walking dead?
Are your clients a director of a zombie company? Your clients almost certainly are, if the company can or can’t do one or more of the following:
- Can barely pay running costs and no more than interest on loans.
- Can’t fulfill an agreed schedule to reduce debt.
- Can’t grow because it can’t invest in more plant, equipment and staff.
- Can’t attract funding either from well-recognised financiers or private investors because of mounting pressure from creditors - among which the Australian Tax Office (ATO) is likely to be prominent.
- Have insufficient funds set aside and/or are unable to accumulate funds to pay employee entitlements.
If you are aware of such companies seek professional advice about restructuring. Macks Advisory is proud of its success in uncovering hidden wealth in under-performing companies.
Perhaps you already have a source of such advice close at hand. Then use it before the business’s true value and capacities are forever lost.
You need to appreciate that zombie companies have only been able to survive in Australia more easily than in the UK, Europe or the US, because of the mining boom and extensive government support packages.
However, that boom is a thing of the past. Furthermore the Australian Government is looking to tighten its belt, and with interest rates likely to rise in the not-too-distant future, zombie companies’ survival prospects are diminishing.
Rising interest rates and increased collection activity from the ATO would make financiers even less accommodating with loans, creditors even less accommodating with repayment plans.
In these circumstances the chances of restructuring such companies successfully are lessening.
If the company can’t be saved the best chance of putting it in the most advantageous position as far your clients are concerned is probably now.
Why are zombies increasing?
Apart from owners and directors inertia, governments also help perpetuate zombie companies because of a lack of political will to cull them and support packages that perpetuate their existence.
For instance were the Federal Government to support an interest rate rise or otherwise to make the existence of zombie companies more difficult, hundreds of such companies in Australia would of course die in the light of those decisions.
While these collapses into insolvency would free up human and financial resources that had been resuscitating them for years, even though their disappearances would enable healthy companies to help grow an economy, governments know only too well that rises in insolvency rates are political poison.
And so, companies that have been going nowhere for a decade and show no signs of profitability continue their economic retardation until eventual collapse that invariably drags down other companies with them.
It’s a state of affairs further supported by creditors’ increasing willingness to allow floundering companies to survive by relaxing payment conditions, believing this will eventually enable them to recover their money.
Banks too, have vested interests in keeping companies’ recovery and turnaround strategies in process - if for no other reason than an existing company can continue making loan repayments, but in the absence of a cogent turnaround strategy this does no more than reduce the business equity that is available.
In Australia, the ATO, usually a substantial creditor of companies teetering on the brink of insolvency, has its own agenda for debt recovery. It may be that such a strategy has little if anything to do with discouraging the existence of zombie companies.
Finally, government stimulus packages tend to foster economic environments favouring what governments assess as their own fiscal necessities, rather than as a means to eliminate the corporate walking dead, who therefore will remain with us, most likely in increasing numbers, long into the future.
Here, however, are two possibilities for at least slowing the rate of increase: When banks sell under-performing loans to other large financiers, they can only do so at realistic values, in other words, at a potential loss. However, should banks be persuaded to reorganise their books so as to reduce the number and size of loans made to zombie companies - or companies with early signs of zombie syndrome – there would be fewer corporate zombies.
And of course the rate of increase could always be reduced, were increasing numbers of business owners willing to seek professional help before a company’s recovery from zombie syndrome became an impossibility.
For more information, contact Macks Advisory on 08 8231 3323 or visit our new office at Level 8 West Wing, 50 Grenfell Street, Adelaide SA 5000.
