The term ‘zombie company’ has been around since the late ’80s when the Japanese economy collapsed, and banks propped up many large corporations that would have otherwise failed.
It has come to refer to any business that is so debt laden that it is only able to pay the interest on its loans, not the principle, once other fixed costs are paid. No cash for growth but able to keep the lights on – existing in limbo just like the living dead of popular culture.
In Australia, safe harbour insolvency protections that helped to prop up struggling businesses expired in January this year. And emergency measures during the COVID pandemic such as JobKeeper, loan holidays from banks, and a more lenient approach from the ATO and ASIC have seen external administrations fall from pre-COVID levels.
How many zombie companies are out there?
So, how many zombie businesses are out there teetering on the brink as lockdowns end and borders reopen? CreditorWatch CEO Patrick Coghlan says the number of Australian companies going into administration pre-COVID was consistently around 700 or 800 per month.
“It was fairly constant. And when you have a 50 per cent drop, as we have seen since COVID began, that’s 50 per cent of companies that haven’t gone into administration that should have.
“Once the ATO and the major banks get back into their normal wind up/administration rhythm as part of their collection process, we’ll start to see that increase in administrations. It will be the businesses that have been holding on and taking advantage – the so-called zombie businesses.”
However, Coghlan concedes that while zombie companies still pose a risk, it is not as great now that the safe harbour provisions have been removed and they can no longer trade insolvent.
“There’s going to be less of them around as a result. There is less concentration risk around many of these companies falling over and causing a domino effect throughout the economy. That’s not to say that these companies have all gone away – far from it.”
How to identify a zombie company
As zombie businesses generally appear perfectly normal to outside parties, it can be difficult to identify them, even for companies trading with them. ASIC and the ATO do not report specifically on zombie businesses so it is practically impossible to identify all of them. However, Coghlan says “keep an eye out for ATO tax defaults on credit reports as this will be a near certain sign that a company is headed towards administration”.
“It’s very hard for them to operate under the radar outside of COVID, but what they would do for example is rack up a bill with the ATO, put off paying that for as long as possible, essentially using the ATO as a bank. Then the ATO closes them down and all the other creditors out there are adversely affected because they thought they were trading fine.”
But he adds that it can be easier to identify zombies in more visible industries such as retail and hospitality.
“If they’re a retailer that relies on foot traffic, with no online presence, and they’ve shut up shop, they’re not trading so they’ve got no revenue, but they haven’t gone into administration you’ve got to question how they’re paying their bills, particularly over an extended period, because we know that small businesses typically have around 12 weeks of cashflow.
“If you’ve been closed for a significant portion of that or longer, you’re basically hibernating and taking advantage of the support of your bank and the fact that the ATO and ASIC won’t wind you up. You wouldn’t be giving these businesses goods or services on credit.”
Coghlan adds that CreditorWatch’s trade receivables data shows business turnover is down 37% on a year earlier which is putting increasing pressure on cashflow and cash reserves.
“There are also a number of regions around Australia that have been identified in our Business Risk Index that would certainly be a hotspot for them,” he says.
Top 3 High Risk Industries – by probability of default in the next 12 months:
1. Food and beverage services: 5.97%
2. Arts and recreation services: 4.03%
3. Education and training: 3.99%
Top five areas at most risk of default are:
• Merrylands – Guildford NSW: 7.76%
• Gold Coast – North QLD: 7.73%
• Bringelly – Green Valley NSW: 7.66%
• Canterbury NSW: 7.57%
• Coolangatta QLD: 7.45%
CreditorWatch is a commercial credit reporting bureau used by over 50,000 businesses across Australia. Our users get access to credit reports, customer monitoring and debt collection tools to better manage credit risk and reduce bad debt.
‘This article was first published in Banking Day on 29 November. You can read the original article here.