Zombie Firms: The Transformative Impact of Private Credit and Bankruptcy Reforms

The rise of zombie firms is a growing concern in today’s economy. Extended low interest rates and economic disruptions have concluded in firms not producing enough profits from operations to meet their debt obligations. Recognising “zombie firms” is crucial to avoid risky investments, as these companies can drain financial resources and undermine portfolio performance. Identifying them early, helps investors and lenders make informed decisions, mitigating potential losses and ensuring more strategic allocation of capital.

Wiserfunding can support you with advanced credit risk intelligence. Our platform, in collaboration with our experts, provides you with real-time data to help pinpoint potential risks, thereby enhancing the management of your portfolio.

The rise of Zombie firms

Zombie firms, companies that don’t produce enough profits from operations to meet their debt obligation, have had an average increase of 8.8 percent annually for the past 5 years. In 2023, the Global Management Consulting Firm Kearney identified 827 new zombie companies, bringing the total to 2,370 (2022: 2,206).

A recent analysis of zombie firm outcomes, conducted by Wiserfunding co-founder Professor Edward I. Altman and his colleagues Rui Dai and Wei Wang, provides insights into the differences between US and non-US “zombies”. Of the 8,910 zombie firms operating between 1990 and 2023, the researchers analysed 3,302 entities based in the US and 5,608 outside the US.

Zombie Firms in the US vs The Rest of the World

Approximately 15.3% of US zombie firms eventually filed for bankruptcy under Chapter 11 or Chapter 7. Another 42.3% were delisted from stock exchanges, indicating that 58% of US zombie firms ceased operations or were significantly restructured. The median time for a US zombie firm to either file for bankruptcy or be delisted was 3.7 years, with a skewed distribution showing some firms remaining in zombie status for up to 11 years. About 31.4% were acquired, and 11.1% recovered from their zombie status within an average of 4 years.

 

Proliferation and Outcomes

The rise of Zombie firms has significant implications for bankruptcy law and financial stability.Kearney’s analysis of a dataset dating back to 2000, on nearly 76,000 publicly traded companies across 154 industries and 152 countries— 45,000 of which were active in 2023— shows that higher borrowing costs are exacerbating this trend. Stress tests suggest that rising interest rates could further increase the proportion of zombie firms, with smaller companies being particularly affected. In 2023, the share of zombies among companies with annual revenues of $500 million or less grew from 6.2% to 6.7%.

The Bank of England’s interest rate cut from 5.25% to 5% offers some relief for zombie firms by reducing their borrowing costs. This can ease financial pressures, delay bankruptcy, and give firms time to restructure or refinance their debt. However, the governor’s cautious stance on future rate cuts means that firms should still prepare for high borrowing costs and continue addressing underlying issues to avoid prolonged inefficiencies.

In contrast, bankruptcy law reforms have had a different impact on zombie firms. Research shows these reforms cut the duration of zombie status by about 25%, translating to a one-year reduction from the average of 4.5 years. Reforms boost the likelihood of zombie firms being terminated, increasing their “death” rate by 7-14%.

The Bank of England’s interest rate cut from 5.25% to 5% offers some relief for zombie firms by reducing their borrowing costs. This can ease financial pressures, delay bankruptcy, and give firms time to restructure or refinance their debt. However, the governor’s cautious stance on future rate cuts means that firms should still prepare for high borrowing costs and continue addressing underlying issues to avoid prolonged inefficiencies.

In contrast, bankruptcy law reforms have had a different impact on zombie firms. Research shows these reforms cut the duration of zombie status by about 25%, translating to a one-year reduction from the average of 4.5 years. Reforms boost the likelihood of zombie firms being terminated, increasing their “death” rate by 7-14%. Policymakers must continue adapting legal frameworks to ensure economic stability and support a healthier business landscape.

Stay Ahead in the Evolving Market: Understand the Impact of the Zombie Firms

The prevalence of zombie companies is a significant factor shaping the future of investment landscapes. Staying informed and proactive is crucial for navigating these challenges effectively.

Contact our experts on enhanced analysis:

1. Evaluate Your Portfolio: We’ll review your current investments to identify any exposure to zombie firms. Our expert will help you assess how these companies might impact your overall portfolio performance and risk profile.

2. Adjust Strategies: Get insights on zombie firms and bankruptcy reforms to manage your investment strategies. Consider reallocating assets or adjusting your approach based on the evolving financial environment.

3. Stay Informed: Our platform, in collaboration with our experts, provides you with real-time data on firm stability and investment opportunities empowering you to make more informed decisions.

Stay ahead and make strategic decisions that drive your investment success in today’s complex market landscape.