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Richard Godmon Headshot

Can You Spot a Zombie?

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The financial press has been reporting a new threat to Britain's economic recovery - from so-called 'zombie' companies. A zombie company is one saddled with too much debt and insufficient income to pay off what it owes. Like the creatures from horror movies they stagger on trapped in limbo, financially unviable but still servicing their debt and so unable to die.

The alleged threat these companies pose is that, because of prolonged low interest rates and banks showing forbearance with debtors, many companies have become zombies without being detected. And when interest rates rise we will see a wave of business failures. Some claim that this could affect up to 10% of British businesses.

The idea is plausible and it certainly makes a powerful story. In a world that has already had to come to terms with the reality of toxic assets, the zombie metaphor was far too good for financial journalists to ignore. But the question is - do you believe in zombies? And if so, could you spot one?

A good starting point is to look in the right locations. Zombies are largely an urban phenomenon and the prime locations for finding them are, ironically, sub-prime locations. Deserted shopping malls, empty office blocks and building projects that have inexplicably ground to a halt. Behind such scenes of urban dereliction lie zombie companies trapped because they failed to anticipate the collapse in property prices and ran out of money.

Considering the insatiable zombie appetite, another sector reported as being a breeding ground is that of hotels and catering. Here companies may have avoided the property collapse, but being labour intensive businesses they have high operating costs. So if the recession has eaten into profit margins, many could be doing little more than servicing their debt.

But is our economy really plagued by mindless, debased organisations feeding off all that is wholesome? OK, given recent corporate scandals, some might say yes - but that's another matter. In the world of owner-managed SMEs, which make up the vast majority of UK business, most of the unviable companies have already failed. The survivors are either doing nicely (albeit quietly) in profitable sectors. Or they have trimmed everything back and are waiting patiently for the right time to reinvest.

They are quiet, but not dead - and certainly not undead.

On the other hand, common sense says that there must also be many organisations trapped in a cycle of debt. So if it was so hard to spot toxic assets, how might we spot a zombie company?
Perhaps the analogy itself provides a clue towards the answer. In the horror movies I've seen, zombies have never been the greatest of communicators. You get a few grunts and groans but not much in the way of reasoned conversation and debate. We speak regularly with our clients, and through this interaction we know their plans, what they are thinking and how they are adapting their business strategy.

If businesses and their advisers are communicating regularly, they will already have a very good measure of who they are dealing with. And if they do not, perhaps more than one of them is the zombie.