Is It Time to Kill Off UK’s Zombie Companies?
Staff Writer, CNBC.com
As any horror film buff knows, zombies are difficult to kill. And the zombie companies which are increasingly causing concern in the U.K. are also going to be tricky to get rid of.
Lurching around, staying alive because low interest rates mean that they can continue to pay off the interest on their debts, but not growing, some of these businesses may be better being lopped off like a rotting limb.
This is helped by the U.K.’s loose monetary policy, which means that its banks are able to roll existing loans rather than insist that the money is repaid.
There are close to 150,000 U.K. businesses which are just servicing their debts, rather than repaying the capital, according to insolvency body R3. Even big names like pubs company Punch Taverns , which issues a trading statement on Thursday, or travel agent Thomas Cook have been dubbed zombies.
Punch, which is sitting on a debt pile of more than 2 billion pounds ($3.24 billion), is believed to be close to securing a deal to restructure its debt, but will have to sell off around two-fifths of its pubs to do so.
Fewer companies have gone bankrupt than during the recession of the 1990s, when gross domestic product (GDP) growth didn’t fall as much from peak to trough, which is believed to be one of the key elements keeping unemployment figures relatively healthy.
Economists talk about the “productivity puzzle” in the U.K., where GDP and unemployment are out of sync. But when insolvencies are plotted against unemployment, the relationship looks more aligned. This suggests that it is the relatively low insolvency rate which is where the secret to unemployment figures lies.
The productivity puzzle could also be explained by companies having more cash on their balance sheet and not taking on big investments.
The relatively low insolvency rate may partly be because the U.K.’s state-backed banks are coming under pressure to allow companies to keep going for longer.
“It may not be good that banks are showing more forbearance. If they are then that would suggest that companies which may be more deserving are not able to borrow,” George Buckley, chief UK economist at Deutsche Bank, told CNBC.
There is the classic Schumpeter's gale or “creative destruction” principle which suggests that the destruction of older companies can be a positive if it clears the way for new innovations.
“The effect on unemployment would be bad in the near term, but could be good in the long term. At least you would be allowing other companies to set up,” Buckley argued.
Jon Moulton, the chairman of Better Capital who founded UK venture capital firm Alchemy Partners, has also spoken out against the trend.
Worries about “zombie capitalism” are leading many to draw unflattering parallels between the UK and Japan in the late twentieth century. In Japan, "evergreening" in the late 1990s helped create some of the low-growth corporates which are still hanging around today, Simon Wells chief UK economist at HSBC, pointed out. In the long term, its consequences could be almost as alarming as the invasion of a zombie army.