Halloween on the ASX: The number of ‘zombie’ companies is creeping up
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More than 100 companies listed on the Australian stock exchange are on the brink of collapse, a rise of 51 over the past six months alone, with a restructuring expert predicting the rise of “zombie” companies will continue.
Data analysis from KPMG, which has developed a financial performance index to give listed companies a health score out of 100, found 127 companies received a score of zero across three consecutive quarters as of late October, up from 84 companies in May.
The number of ASX companies barely surviving has been steadily increasing.Credit: Dion Georgopoulos
A combination of factors – higher interest rates and inflation, rising costs such as electricity and staff wages, tightening capital markets, and a tax office more determined to chase business debts – has put mounting pressure on companies that are making less money from customers watching their budgets.
“The rubber has to hit the road at some point when you think of the economic uncertainty that’s going on,” said KPMG head of turnaround and restructuring services Gayle Dickerson.
“Zombie” companies tend to be close to defaulting, may have liabilities that exceed their market value, are breaching their covenants or are barely making profits. Not only are there more of them, but it’s also hitting bigger businesses: the average market cap of these companies has ticked up from $20 million to $24 million.
“It could fall over at any time,” Dickerson said.
“We’ve got $3 billion of market cap tied up in zombie companies … If you’re a stakeholder, creditor, employee and you’re owed money from these companies, you’re at potential risk of then becoming insolvent and [feeling] financial pain.”
During the COVID-19 pandemic, many companies were kept afloat through government assistance such as JobKeeper payments. As regular trading conditions resumed, albeit in a weakening economic environment, the number of struggling businesses has steadily increased. “The trend has been creeping up,” Dickerson said.
Interest rates, which began increasing in May 2022 after two years at 0.1 per cent, have been a key factor pushing more businesses into zombie territory. There were 26 zombie companies in March 2022, lifting to 66 in September that year.
“If you’re already a company struggling and you’ve got another rate rise, you’ve got to service that debt,” Dickerson said. “One of the options might be to seek an alternative lender, and sometimes their interest rates can be even higher. So it can be a cycle.”
Raw materials and natural resources companies have been the hardest hit, with 24 zombies from this sector, followed by tech and telco players with an increase of six. Meanwhile, there are no zombie companies in the financial services, utilities, real estate, aerospace or defence sectors.
“Not yet,” said Dickerson, who earmarked consumer discretionary retail and construction sectors as vulnerable in the months ahead. “Watch this space, I suspect that may shift.”
Higher-than-expected inflation data has lifted expectations of a further rate rise on Melbourne Cup Day after new Reserve Bank governor Michele Bullock said the board “will not hesitate” to do so to control inflation.
Further rise would push more companies into zombie territory. “I certainly don’t think this is the peak,” Dickerson said.
Company directors are being urged to act early and engage in conversations with the bank to allow for shareholders to “recycle capital” and put their investment money into something else.
Nearly 8000 Australian companies entered into external administration in the 2023 financial year, an increase of nearly 50 per cent on 2022, with Sara Lee, Fenton & Fenton, Sukin owner BWX and a spate of recruitment firms recently going under. An annual survey found 90 per cent of insolvency sector experts believe the economy will tip into a recession in the next two years.
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