‘Zombie firms’ unable to meet borrowing costs rise 10% in 2022, new Kearney report finds

‘Zombie companies’ that cannot cover interest with current operating profit now account for almost 5% of all companies worldwide
The global debt carried by these companies is equivalent to nearly 400 billion dollars findings report
Property sector again poses ‘considerable risk to global economy’

LONDON, October 26, 2022 /PRNewswire/ — Leading global consulting partnership, Kearney, today released new data showing that a rapidly growing number of companies have become “zombie companies”, meaning companies that have not been able to cover the interest costs on their borrowings over the last three years, based on their current operating income. These so-called ‘zombie companies’ are at imminent risk of insolvency as interest rates rise worldwide and now account for 4.7% of all listed companies globally.

Kearney’s study drew on around 4.5 million data records from around 70,000 listed companies from 154 industries and 152 countries. He finds that the number of zombie firms has increased by 10% since 2021, to nearly 2,000, and could rise further as interest rates continue to rise.

Around the world, the share of zombie companies averages between 4% and 6%, but with significant differences in growth rates. Whereas North America seen the share of zombie companies increase from 3.5% to 5.7% between 2010 and 2021, Europe saw a much larger increase from 1.2% to 5.5%.

Stress tests undertaken as part of the Kearney study show that the proportion of “zombie companies” is expected to increase. Barring a change in the economic environment, the number of zombies would increase by 17% if the average net interest rates of 2021 (currently 1.5%) increased by 1.5x in 2022, or would increase by 38% if these rates d interest doubled.

Worldwide, these companies already represent $108 billion inefficiently deployed equity and together carry a total debt of almost 400 billion dollars. Globally, most zombie companies are in the middle market, although this is probably only the tip of the iceberg: more middle market companies are not publicly traded and do not are therefore not included in these figures, but could also correspond to the definition of a “zombie society”.

Of all the industries studied, the real estate sector has the highest percentage of zombie companies globally, with real estate developers (9%) and diversified real estate companies (11%) being particularly affected. If interest rates continue to rise relative to 2021, up to 15% of companies in the real estate sector will be zombified, or one in seven listed companies in this sector. This means that, as in the years before the financial crash of 2008/9, the real estate sector once again poses a considerable risk to the global economy.

Nils Kuhlwein von Rathenow, Partner at Kearneycomments:

“Over the past year, it has become clear that rising energy and raw material costs, tight supply chains and staffing shortages are weighing on business revenues, with funding challenges compounding the problem for many.

“However, only a few companies with unsustainable business models are exiting the markets due to insolvency, and every year more are becoming ‘zombie’ companies, in part due to easy access to capital. But as interest rates rise, it will become even more unsustainable, potentially increasing the number of zombie entities again by almost 40%.

Christian Feldmanpartner at Kearney, adds:

“A particularly worrying finding from our analysis is that one in seven listed companies in the global real estate sector is at risk of being classified as a zombie company, worryingly mirroring the years leading up to the financial crisis of 2008/2009.

“Overall, we see around 500 billion dollars misallocated by these zombie companies, leaving them at significant risk of failure. Against this backdrop, institutional and private investors, legislators, and capital market regulators are challenged to efficiently allocate capital in a timely manner, avoid the risk of zombie firms, and equip corporate finance laws. insolvency to ensure that ‘sick’ companies leave the market in a timely manner. way. The numbers are clear, we need to act now.”

Notes to Editors

For Kearney’s analysis, Kearney’s experts reviewed approximately 4.5 million records of some 70,000 listed companies from 154 industries and 152 countries. Thus, the analysis covers all listed companies in the world since the beginning of the millennium.

Kearney based his analysis on the OECD definition of a zombie firm:

  • The company has been on the market for more than 10 years.
  • It was unable to cover its interest expense from its operating income for three consecutive years.

Concretely, we have implemented these criteria as follows:

  • We only analyzed publicly listed companies for reasons of data availability
  • Revenues have been above zero for 10 consecutive years.
  • The EBITDA/net interest payments interest coverage ratio has been below 1 for three consecutive years.

Applying these criteria, Kearney determined for each of the approximately 70,000 companies examined whether it met the definition of a zombie company in a given year. So while zombie businesses can be resurrected, they can also relapse and revert back to zombie status again. Additionally, Kearney determined how each individual zombie business evolved over time. The following scenarios are possible for a zombie business to exit zombie status:

  • Insolvency/liquidation: A zombie company goes out of business and is liquidated. No further distinction was made as to how and why operations were halted.
  • Acquisition: A zombie company, while in zombie status, is purchased by another company and continues to exist as a subsidiary of the parent company or is fully integrated.
  • Resurrection: A zombie business recovers and continues to operate in the market as an independent business with no interest charges exceeding its operating profits.

Additionally, Kearney analyzed for 2021 how the stress of a higher interest rate would impact zombie numbers. For this purpose, Kearney assumed interest rate stressors of 1.5 (stress scenario 1) and 2 (stress scenario 2), respectively, i.e. the interest rate is one and a half times or double the rate it was in 2021.

About Kearney
Kearney is one of the world’s leading management consulting firms. For nearly 100 years, we’ve been the trusted advisor to C-suites, government agencies, and nonprofits. Our employees make us who we are. Determined to make the difference between a great idea and its realization, we help our clients break through.

Press contacts
Tom Stewart-Walvin
Rostrum – Kearney Public Relations Consultants
[email protected]
[email protected]

Logo – https://mma.prnewswire.com/media/74053/a_t__kearney_logo.jpg


Previous $230 Million in Real Estate Auctioned Live at Sotheby's New York in Sotheby's Concierge Auctions December Sale
Next Opinion: Why your real estate agents aren't adopting your technology