I worked with a zombie

Zombies, the living dead, may be part of ancient folklore with a rich and storied history but they’ve only dragged themselves out of internment in the corporate world relatively recently – although not as recently as coverage of the COVID-induced economic crisis might imply.

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Pic: 1943 film "I Walked With a Zombie"

Translated into western culture via Haitian voodoo and West African mythology, the “living dead” have certainly been reanimated in a plethora of movies and television series over the last couple of decades.

Now they are slouching further into the corporate world.

"In the corporate world, a zombie is defined as a company which hasn’t actually died but is not earning enough cash profit to meet its interest payments.”

According to British think tank Onward, one in every five firms in the Old Dart is a zombie and the figure is, well, rising up.

Zombies are bad, according to Onward, causing “slower employment growth that could mean over 400,000 fewer jobs created in a recovery that takes over twice as long, and lower productivity leading to GBP41 billion of lost growth over 5 years - more than GBP500 per person”. They’re a lot more serious than Shaun of the Dead.

Clinging to life

Just like World War Z, this is a global scourge. Among 24 Organisation for Economic Cooperation and Development (OECD) countries the average for zombie companies was 12.4 per cent. The Federation of Korean Industries reckons just fewer than a fifth of its corporate population is infecting the rest. (See Train to Busan).

In folklore, the actual dead are brought back to life, by magic, by disease or radiation or simply bad television. (Not a bad list here.)

In the corporate world, a zombie is defined as a company which hasn’t actually died but is not earning enough cash profit to meet its interest payments.

The fear is with ongoing pressure on economies and corporate earnings, company profits will remain depressed. However, loan and tax deferrals along with government subsidies will generate a build-up in debt – which will eventually have to be repaid.

Australia is at that point now where debt is accumulating. Loan deferrals are in place while various other fiscal assistance packages have been implemented at both state and federal level.

According to ratings agency CreditorWatch late payments between businesses have lengthened to 43 days yet the number of companies entering voluntary administration has fallen almost 60 per cent, which the firm argues are signs of a rising number of zombies being propped up by handouts. Businesses are waiting 2.9 times longer to be paid than they did in 2019.

Insolvency firms and others in the corporate undertaking caper have also expressed concern at the lower than expected number of company failures and fear these will come with a rush when artificial sustenance stops flowing.

A Federal Government initiative to offer relief to companies trading while insolvent – usually against the law – also increases the likelihood of companies clinging to a semblance of life.

Wind up now

ANZ and other banks have stressed on several occasions they are not deferring repayments on loans – business and consumer – where the borrower has little chance of recovering. Typically, deferrals are only granted where the customer is not behind on payments when deferral is sought and has genuine prospects of recovery – that the issue is really liquidity rather than solvency.

ANZ’s Head of Australian Banking Mark Hand told bluenotes that, while it was difficult for some to accept, “for some business owners, the smartest thing for them to do is to wind it up now and walk away with some equity”.

He expanded on that at the recent parliamentary inquiry.

“Our concern is that it is very easy for a customer to continue to dig a deeper and deeper hole because they believe things will return to normal,” Hand said. “I have no doubt that, having worked through the 1992 recession and seen this kind of thing play out, there are customers who will believe—because a lot of small business customers are entrepreneurial and optimistic by nature—that they can trade out of this.”

“My message is to make sure they have a very realistic view of the future—what's changed and how it's going to impact them,” he continued. “They should speak to people like their accountant to understand the viability of their business going forward, and they should consider that they may need to do something different going forward. In terms of spikes in insolvency, it is too early to tell. We have not yet seen a spike in our flows into what we call lending services—the division of the bank that helps manage customers that are in financial difficulty—that is out of the normal, so it's too early to tell.”

Crystallising a loss

Zombies first entered the corporate world in Japan following the collapse of its bubble economy in the early 90s. Critically, there were two components to their perverse lives. One was what we see today: government support, lender deferrals and other relief, particularly pronounced with Japan’s then insular and parochial government-business complex.

The other factor was it actually made sense for banks not to foreclose on the barely alive. To shutter a company meant crystallising a significant loss. But with interest rates near zero – as indeed they are today – it actually made sense to keep rolling over the loans and capitalising the low interest missed.

At least it looked better. The problem was it also contributed to at least two decades of moribund economic growth as capital and resources were tied up in companies with no real prospects while emerging entrepreneurial and innovate companies, vital to economic recovery, were starved of financial and human resources.

This is the co-morbidity of a zombie apocalypse: not only do the zombies themselves not contribute to economies, they drain resources from more vital firms which are needed to create jobs and spur economic recovery. It’s a replay of the insidious effect of industry protection.

Zombie relapse

The Bank for International Settlements (BIS), the global bank regulator, has actually studied the undead.

In a work which sounds just a little less riveting than a George A. Romero pic, Corporate zombies: Anatomy and life cycle, the BIS found “a rise in the share of zombie firms from 4 per cent in the late 1980s to 15 per cent in 2017” – so zombification was a scourge well before COVID-19 emerged.

“These zombie firms are smaller, less productive, more leveraged and invest less in physical and intangible capital,” the research found. “Their performance deteriorates several years before zombification and remains poor in subsequent years. Twenty five per cent of zombie companies exited the market (died), while 60 per cent formally recovered from zombie status.”

Critically however: “recovered zombies underperform compared to firms that have never been zombies and they face a high probability of relapsing into zombie status.”

This is the lurking nightmare of a post-COVID normality, an economy where recovery is impeded by the very measures undertaken with the best intentions during the acute phase.

The dead are among us.

Andrew Cornell is managing editor of bluenotes

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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