Digital Zeitgeist – The Purging of UK’s ‘Zombie’ Firms: Interest Rates as the Harbinger of Doom
Begbies Traynor, a venerated business recovery and financial consultancy firm, has prognosticated the extinction of the United Kingdom’s debt-ridden “zombie” companies due to an impending surge in interest rates. In a grim forecast for these companies, struggling to service their debts and barely surviving through cheap borrowing costs, Ric Traynor, Executive Chairman of Begbies Traynor, anticipates their complete dissolution by the end of next year.
What are ‘Zombie’ Firms?
UK ‘zombie’ companies are businesses that are heavily burdened by debt, struggling to service these debts, and are surviving on the life-support of cheap borrowing costs due to low-interest rates. These firms are barely able to generate enough cash flow for their operation and to meet their interest payments, thus preventing them from investing in growth opportunities. They essentially exist in a state of near insolvency, neither growing nor completely failing, hence the term ‘zombie.’ Their survival is often dependent on the prevailing economic conditions, with factors such as low-interest rates and lenient creditors playing key roles.
In Traynor’s words to Bloomberg, “Over the next 18 months, we’ll see virtually all of them finally come to an end”. His firm, often seen as the bellwether for UK businesses’ health, has experienced a double-digit annual revenue and profit growth due to an upsurge in insolvency appointments and an enhanced reputation for managing mid-sized insolvencies.
The Rising Tide of Insolvencies
Alarmingly, the rate of company insolvencies in England and Wales has reached a 24-year peak. Businesses across the region grapple with escalating energy and wage bills, exacerbated by higher interest rates. Data from the Insolvency Service revealed a staggering 2,552 companies filed for insolvency in May alone, marking a 40% surge from the previous year and the highest since the challenging times of 2009. This surge surpasses even the insolvency figures recorded during the pandemic, when the UK government had support measures in place to mitigate the economic fallout.
Begbies Traynor capitalised on this turbulent climate, with their pre-tax profit for the year to 30 April climbing to £6m, a notable upswing from the preceding year’s £4m. Concurrently, revenues ascended by 11% to reach £121.8m. Encouraged by these results, the company hiked its dividend by 9% to 3.8p a share.
Nurturing Growth Amidst Crisis
As the holder of an 11% share of the administration market, Begbies Traynor is eager to manage larger and more complex insolvencies. Ric Traynor is of the view that their insolvency team will benefit from the recent upsurge in insolvency appointments and an expanded order book.
Traynor observed: “We’ve seen an increase in activity for smaller companies over the last year because they tend to be the first ones that are hit when there’s a problem. We’re now moving into mid-market companies.”
To bolster its capacity, the company acquired the London-based property finance brokerage Mantra Capital and two chartered surveyors, Budworth Hardcastle in eastern England and Mark Jenkinson & Son in South Yorkshire. It also took over another chartered surveyor, Banks Long & Co, further solidifying its footprint in eastern England.
Economic Outlook: Gloom with Silver Linings
The macroeconomic climate seems to favour companies like Begbies Traynor. As Russ Mould, the investment director at the stockbroker AJ Bell, noted: “Begbies Traynor tends to thrive when economic conditions are gloomy. It has seen increased work for insolvencies, which reflects how businesses can crumble under the pressure of higher rates.”
Mould points out that several companies have reached a tipping point where they cannot generate enough cash to service their debts and thus have no alternative but to capitulate.
Not all businesses struggle in these economic conditions, though. The UK’s largest pawnbroker, H&T, for instance, has prospered, with its gross lending growing by 22% to £128m in the first six months of this year. The company reports record levels of demand for pledge lending, a trend that is gaining momentum.
“While it is easy to conclude these companies are profiting from the misery of others, both would argue they are doing an important service,” Mould commented, reflecting on the operations of both Begbies Traynor and H&T.
The Devil’s Advocate: A Contrarian Viewpoint
To conclude, it is essential to present a ‘devil’s advocate’ viewpoint. While the grim forecast for the UK’s “zombie” firms may be viewed as impending doom, one could argue it is a necessary and overdue correction.
High-interest rates could be seen as a purging force, a cleanse that will eliminate weak firms that have survived on low borrowing costs rather than robust business models. This pruning may strengthen the business ecosystem, allowing healthier companies to thrive without the burden of supporting these ‘zombies’.
Moreover, while companies like Begbies Traynor and H&T may be perceived as benefiting from the turmoil, they are providing essential services in troubled times. They are helping manage insolvency procedures and offering alternative lending services, thereby contributing to economic stability.
Ultimately, the extinction of ‘zombie’ firms could be the bitter pill the UK’s business sector needs to swallow to prepare for a healthier, more resilient future.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of GPM-Invest or any other organisations mentioned. The information provided is based on contemporary sourced digital content and does not constitute financial or investment advice. Readers are encouraged to conduct further research and analysis before making any investment decisions.