Eleanor Temple

UK ‘zombie business’ numbers drop to record low in the North and across the UK

The proportion of companies across the North which are only paying the interest on their debts – one of the signs of a so-called ‘zombie’ business – dropped to just 1% in December, even lower than the UK-wide figure of 3%, according to indicative research by R3, the insolvency and restructuring trade body.

Across the UK, the proportion of businesses only paying interest on their debts – equivalent to 49,000 firms – is now the lowest it has been since R3 began tracking ‘zombie businesses’ in June 2012. It had reached as high as 9% in November 2012 and August 2014; prior to April’s 5%, it was 8% in September 2016.

R3’s research, based on interviews with 500 nationally representative businesses by BDRC, also found that other signs of acute distress have dropped to record or near-record lows.

In the North, as in the rest of the UK, just 1% of companies surveyed report that they are having to negotiate payment terms with creditors, or would be unable to repay debts if there was a small increase in interest rates.

Eleanor Temple, chair of R3 in Yorkshire and a barrister at Kings Chambers in Leeds, says: “Although the wider economic picture isn’t an optimistic one, fewer companies in the North and across the UK appear to be struggling to meet some key immediate financial obligations than in recent months.

“The fall in businesses only paying the interest on debts comes despite the first rise in UK interest rates in a decade. Instead, it may be that November’s modest rate rise concentrated directors’ minds and, with the prospect of further rises in the near future, may have prompted businesses to deleverage or refinance now to avoid future pain.”

She continues: “With the growth of alternative lending providers over the past five years, including peer-to-peer lending and growing private equity interest in distressed businesses, it has become easier for struggling businesses to move out of immediate financial danger.

“Also feeding into this is economic uncertainty which may be putting off businesses from investing or expanding. This frees up cash for paying down debt, albeit at the cost of long-term productivity improvements.”

R3’s December research also saw other signs of business distress apparently fall back from a recent upward trend, with only around 12% of businesses in Yorkshire and Humber and the North East reporting at least one of five problems (decreased profits, reduction in sales volumes, regular use of maximum overdraft, recent fall in market share, making redundancies). This compares with 16% of businesses nationally reporting at least one sign of distress.

In September 2017, 24% of businesses in Yorkshire and Humber and the North East had reported one of these signs of distress, up from just 8% in April 2017, but a fall from 33% in September 2016.

However, the research also indicates that levels of business growth remain flat, below record highs. Just 27% of firms in the region report at least one sign of growth (increased sales volumes, increased profits, investing in new equipment, market share growth, business expansion) compared to 55% of companies across the UK. The regional figure fell from 45% in September 2017, itself a reduction from 68% in April 2017 and 65% in September 2016.

Businesses’ economic pessimism is also continuing to rise, with around 33% of businesses in Yorkshire and the Humber and the North East now more pessimistic than they were three months ago, higher than the UK average of 27%. In the region, just 20% of businesses are more optimistic than three months ago, compared with 40% nationally.

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