Number of zombie companies continues to grow

The number of companies that are unable to cover current interest liabilities with their operating results for three years in a row, and thus do not have a functioning business model, is increasing worldwide. Compared to last year's study, the number of these so-called zombie companies has increased by 10% to almost 2,000. This is the conclusion of the final analysis by global management consultants Kearney, for which the study's authors drew on approximately 4.5 million data records from around 70,000 listed companies from 154 industries and 152 countries.

Zombie companies have too easy access to capital

"We observe that rising energy and raw material costs, strained supply chains and staff shortages are weighing on companies. Financing problems are compounding the problem for many," reports Nils Kuhlwein von Rathenow, a partner at Kearney and one of the authors of the study "The Walking Debt - The Growing Flock of Zombie Companies." "Only a few companies that do not have a sustainable business model actually exit the markets due to insolvency. Every year, more companies become zombies than exit, are purchased, or recover. Zombies have all-too-easy access to capital, which helps them survive. A particular risk comes from current rising interest rates: our simulation shows that this could increase the number of zombies by nearly 40% again." Globally, most zombie companies are found in the midmarket, although this is likely to represent only the tip of the iceberg, as many midmarket companies are not listed on the stock exchange and are therefore not included in the study results.

Swiss zombies follow worldwide pattern

The study authors looked at both the various economies and industries in detail. Their analyses show that the global economic regions are all developing similarly. They all have a zombie share of between 4% and 6%, but with significant differences in growth rates: While North America saw zombie shares rise from 3.5% to 5.7% between 2010 and 2021, Europe saw a much larger increase, from 1.2% to 5.5%.

In Switzerland, the number of zombies remained constant between 2015 and 2019. The few inflows and outflows balanced each other out. After the yield on government bonds fell in 2018 to 2020, the number of zombies also rose with a one-year delay, initially to 10 in 2020 and finally to 12 in 2021. The typical zombies in Switzerland follow the global pattern: they tend to be small companies. In Switzerland, 10 out of 12 Zombies have less than $50 million in annual revenue. Of the 12 Swiss zombies, four are in the healthcare sector, three in the real estate sector, two in IT and one each from the materials, consumer goods and other industry sectors.

One in seven real estate companies faces zombification

The situation could become even more dramatic. If interest rates continue to rise, one in seven real estate companies could face a similar fate. "In that case, we see one in seven listed companies in the real estate sector worldwide at risk of being classified as a zombie company. This means that the real estate sector poses a significant risk to the global economy, as it did in the years leading up to the 2008/2009 financial crisis," explains Christian Feldmann, a partner at Kearney and also an author of the study. He makes clear: "Zombies represent a misallocation of capital that could otherwise lead to more growth and more return. We see an amount of about $500 billion misallocated and therefore at significant risk of default. Against this backdrop, both institutional and private investors, legislators and capital market regulators around the world are challenged by efficiently allocating capital in a timely manner, avoiding the risk of zombies, and equipping insolvency laws to ensure that sick companies exit the market in a timely manner. The figures for this are obvious and can be transparently traced at any time on the basis of the annual financial statements."

Source: Kearney