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Zombie businesses, good or bad?

Are Zombie Businesses damaging the recovery?

Bank of England data have revealed that there are large numbers of “zombie” businesses across the UK that are being kept alive by their lenders who are unwilling to pull the plug and crystallise their losses.

More than 30% of companies in England and Wales recorded losses in 2009 and 2010, which is the highest number since the data was first collated in the 1990’s. During the same period insolvencies have remained fairly constant.

Many people believe that the economy cannot recover until these businesses have been ‘cleared out’. It is fair to say that many of them, right now, are merely treading water, having breached their banking covenants or failing to meet the capital elements of their debt repayments.

However, the issue is far more complex. We cannot, and must not, assume that all of these businesses have no future and are incapable of recovering and once again prospering. Meanwhile they are supporting employment, and paying business rates etc.

In the late 80’s/ early 90’s, the Banks were undoubtedly guilty of ‘hitting the panic button’. During this period I worked in the regional credit department of a high street bank and I witnessed at first hand the willingness and speed with which support was withdrawn.

There is no doubt in my mind that this attitude aggravated the recession and closed some businesses which could have survived, and prospered, with the right support. This recession is far bigger and more serious. It therefore follows that the effects of bank support being withdrawn could be far, far worse.

So what is the solution? Many advocate putting these businesses into receivership in the hope and expectation that there will effectively be debt forgiveness, and that the business will survive: a so-called “pre-pack administration”. This would have the positive effect of allowing lenders and creditors to reduce or write off non-performing debt. The problem with this option is that right now there are very few buyers out there. Add to this the Banks reluctance to lend, especially to a business in administration and you can see that for many businesses administration would be terminal.

Pre-pack administrations are frowned upon by many who regard them as merely a way for over-geared businesses to divest themselves of debt. Accordingly, and not surprisingly the Banks are suspicious of the motives behind them.

Perhaps a better way for the Banks to proceed would be to do far more debt/ equity swaps to de-gear businesses, thereby giving them a lifeline and the opportunity to thrive and maintaining an active interest in the prosperity of the businesses concerned.

Overall a highly complex problem that is not well served by sensational headlines!

Phil Dibbs

Managing Director

Hawkmoor Associates Limited

07866362333

phil@hawkmoorassociates.com

http://www.hawkmoorassociates.com

This was posted in Bdaily's Members' News section by Phil Dibbs .