Judgement days ahead for zombie companies
Judgement days ahead for zombie companies
Sinead McIntosh examines how the COVID-19 pandemic is threatening to push UK zombie companies into restructuring or administration proceedings.
For well over a decade, the combination of low interest rates and banking forbearance had resulted in a proliferation of zombie corporates in the UK: companies that were just about keeping the lights on and wages paid but far from any kind of dynamic growth. At the back end of 2019, Brexit was considered to be the greatest threat to these zombies, that was until COVID-19…
Pandemic exacerbates corporate debt virus
Demand for the vast majority of products and services evaporated overnight when the UK government imposed a nationwide lockdown on 23 March 2020. Output has subsequently dropped by almost 30% year-to-date. Restaurants and high street retailers that were already under extreme pressure were the first to feel the force of the lockdown, immediately requesting rent holidays from landlords and payment holidays from banks.
The government responded swiftly, implementing a moratorium on insolvency, a number of grant schemes and highly ambitious emergency funding programmes. These include the Coronavirus Business Interruption Loan Scheme (CBILS), the Covid Corporate Financing Facility (CCFF) and the Bounce Back Loan Scheme (BBLS), all intended to give troubled companies breathing space. Pre-existing zombie companies successful in accessing these finances get another bite at the apple.
Chancellor Rishi Sunak launched CBILS promising "to do whatever it takes" to keep companies afloat. In the background, the UK banks supporting these bailouts were attempting to control the outflow of cash by imposing a selective approval process - in principle aiming to support only viable businesses. The pressure from the Chancellor and the central bank to accelerate any such approval process, release liquidity to ailing firms and ultimately take a longer-term view that their credit support will prevent viable companies failing and avoid a huge spike in unemployment has been largely accepted, with retail banks' loan approvals ramping up.
A death knell for the zombies?
The practical reality for zombie companies is, even if they manage to access emergency CBILS funding, the money does not come for free and after the interest-free first year, they'll have to find cash to make repayments. Without making fundamental cuts to their operating base and setting aside any cash they do access, they'll find themselves in hot water when interest becomes payable. Emergency loans aren't risk free either, they are 80% guaranteed by the government but that remaining 20% liability sits with the company directors and owners - so if the owner, zombie or otherwise, has a strong sense of self-preservation, perhaps they won't just jump at the thought of short-term free money without considering the longer-term personal risks.
Go to work, but don’t go to work…
At an individual level, the UK government job retention scheme is understood to have protected 7.5 million employees that would otherwise have been made redundant, with HMRC providing them with 80% of their salary. Whilst this has undoubtably come to the aid of many it hasn't been able to save everyone. There have been significant numbers of redundancies up and down the country as companies desperately try to cut their operating bases. Top of the list of impacted industries is travel and tourism; British Airways, the UK's flagship carrier expects to make 12,000 redundancies alone, one in four of the workforce - an approach which Alex Cruz, BA's Chief Exec said in a letter to staff was indicative of their "strong, well-managed business" that has "faced into, and overcome, many crises in our history" - small comfort to those left unemployed.
What happens when the liquidity tap is turned off?
As 2020 rolls on, the Bank of England predicts we are facing the deepest recession in 300 years. UK banks expect to see a surge in defaults from corporate and retail customers, Barclays alone putting aside $4.5 billion to cover bad debts associated with the pandemic. The UK government is temporarily propping up UK corporations with their gargantuan bail-out but the tap will be turned off and when it is, the small and mighty of many sectors will fall because this is more than just a liquidity crisis. Tactical restructurings are beginning in the hardest hit sectors, as creditors try and make strategic plays to salvage and if possible restore value; and restructuring and insolvency teams across law firms and advisers are preparing to be inundated. The death knell is ringing for the zombie population.
Our specialist restructuring support team draw on widespread commercial and practical expertise to work closely with our clients' advisers to deliver independent, quick and cost-effective restructuring solutions to distressed and defaulted transactions.
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