Daily Management Review

The Zombies' Demise? Why A Rise In Company Failures Is Possible In 2024


The Zombies' Demise? Why A Rise In Company Failures Is Possible In 2024
In the first half of 2024, debt-ridden enterprises in Europe, the Middle East, and Africa will have to compete for $500 billion in refinancing, a struggle that could lead to the demise of many "zombie" corporations even though an anticipated peak in interest rates may provide some relief.
In the biggest corporate refinancing rush witnessed in years, businesses facing rising debt costs after years of low rates will compete to get enough cash as banks rein in risk ahead of new capital standards.
The value of corporate loans and bonds maturing in the next six months is bigger than any other comparable period between now and the end of 2025, according to analysis by restructuring firm Alvarez & Marsal (A&M), which was shared with the media.
A crisis is imminent, according to analysts in the finance sector, as many weaker, smaller enterprises look for new private loans and public debt arrangements at the same time that global government borrowing costs, which affect lending rates, are skyrocketing.
Inability to obtain the money they require at rates they can pay could result in bankruptcies and job losses.
"Interest rate rises are becoming more and more of an issue for companies, particularly those zombie businesses that have been holding on with a sustained period of low interest rates but just barely able to service their debt," said Julie Palmer, partner at UK restructuring firm Begbies Traynor.
"I think we're now starting to finally see the fall of some of the zombies," she added.
In a corporate setting, the term "zombie" is frequently used to describe organisations that depend on financial assistance from lenders, investors, and government agencies to survive.
This can assist banks prevent loan write-offs by, among other things, rescheduling loan repayments or providing lower rates or other more lenient terms.
Already, distress indicators are visible. According to the newest official figures from the British Office of National Statistics, there were 2,308 corporate insolvencies in England and Wales in August, a 19% increase from the same month last year.
438,702 businesses in the UK were assessed to be in "significant" difficulty, up 8.5% from a year earlier, according to Begbies Traynor's quarterly Red Flag Report on corporate distress, which covered the months of April and June.
This summer, the discount retailer Wilko in the United Kingdom entered administration, resulting in thousands of job losses.
The debt restructuring for Casino, the sixth-largest retailer in France, has recently been completed.
"Central banks are taking a breather but aren't ready to say rate hikes are over," Nicola Marinelli, assistant professor of finance at Regent's University, told Reuters. "Banks and private equity shops have waited to see if the tide turned but higher rates don't allow hiding anymore."
After England and Wales experienced the highest number of company insolvencies since 2009 in the second quarter, the Bank of England urged lenders not to underestimate the risk of corporate loan defaults and to avoid relying on models that measure risk across entire sectors rather than individual borrowers.
According to Paul Kirkbright, a managing director in A&M's restructuring practise, one big bank is recommending 100 small firms a month to its restructuring team, up tenfold from 18 months ago. The bank's name was withheld by him.
In the event that more businesses are forced to the brink of failure by excessive finance costs and waning consumer demand, one senior banker told Reuters that their bank has plans to redeploy hundreds of employees to assist distressed business customers.
However, according to Reuters, two senior banking sources, corporate borrowers haven't yet manifested many tangible symptoms of concern.
This resiliency is partially down to the money injected into the economy during the epidemic, but Kirkbright noted that banks' year-end asset quality evaluations, which gauge a loan's underlying health, will be crucial.
According to figures from the Bank of England, total lending fell by 12% in the first half of 2023 compared to the prior six months. In its Q2 Business Finance Review published on September 13, trade group UK Finance characterised the borrowing demand among smaller businesses as "muted."
However, the work of refinancing cannot be postponed indefinitely.
"Our insolvency colleagues are already busy in the smaller end of the market, and that's where it always starts," Kirkbright said, adding that A&M's U.S. restructuring team had also seen a significant influx - a leading indicator for Europe.
The co-founder and CEO of Legalist, a U.S. hedge fund that provides debtor-in-possession (DIP) financing to businesses undergoing Chapter 11 bankruptcy, Eva Shang, told Reuters that her company had received more than 300 funding requests since January, most of which came from Main Street companies that were struggling as a result of rising interest rates and the expiration of COVID stimulus.
Industry experts predicted that stricter capital regulations for banks that take effect in 2025 will reduce their desire to support businesses that want new funding.
The CFO of NatWest Group, Katie Murray, expressed concerns about how Basel III capital standards would affect small company lending at a conference last month.
As they evaluate the profitability of those ties, some lenders have tightened borrowing terms and even completely dropped some smaller business customers, according to Naresh Aggarwal, policy director of the Association of Corporate Treasurers. He cited the retail and construction industries as having the worst strains.
According to managing director of specialised lender ThinCats Ravi Anand, loans based on core profit are significantly more difficult to come by than loan-to-value financing for businesses without substantial asset bases.
"[The leveraged loan market] is always cyclical, some banks are in and suddenly they are out," Anand said. "These loans require much extra work to assess constantly moving cash flows and in this kind of environment," he said.
Private equity firms, who are likewise growing more selective about the companies they assist, are another option available to businesses in need of funding.
A&M managing director Tim Metzgen predicted that any significant company failures would likely have a "contamination effect."
"It feels like a tight rope walker – they may well get to the end, but there are actually some pretty strong headwinds that could topple the person over."