Fintech
The Fintech Apocalypse Has Arrived With the Rise of Zombie Companies
A zombie company is a company that is making just enough money to cover its overhead but not enough to pay its debt or invest in growth. According to research from global management consulting firm, ClearThe number of zombie companies worldwide has increased by 9% since 2010.
Only in 2023, Clear identified 827 new zombie companies, bringing the new total to 2,370. The 2023 figure is a significant increase from the 534 companies that were “resurrected” by improved financials and the 127 that were delisted.
This annual increase underscores the serious impact of corporate financial and business challenges on these companies, which now represent 5.8% of publicly traded companies globally.
To determine these numbers, Kearney analyzed 75,000 globally listed companies across 154 industries and 152 countries. The dataset includes over 5.5 million individual data points and covers information from 2000 to the present.
Due to higher borrowing costs, many companies are struggling to stay afloat and the report confirms that this trend shows no signs of slowing down.
Companies that perform stress tests
Kearney conducted two stress tests that indicate a continued rise in zombie companies, especially if companies are forced to refinance their existing debt at today’s high interest rates.
For example, a company with $1 million in annual interest would see that figure increase to $1.5 million with a 1.5x interest rate increase. Assuming no other changes in business performance, this scenario would turn 6.6 percent of companies into zombies, and a 2x increase could push that figure even higher to 7.7 percent.
Taking a closer look at the size of zombie companies, the report found that smaller companies continue to be more infested than any other group. In 2023, the share of zombies among companies with annual revenues of $500 million or less grew by nearly nine percent, increasing their share within this group from 6.2 percent in 2022 to 6.7 percent in 2023.
Limited access to attractive refinancing options, coupled with weaker processes and governance than larger firms, could make this cohort vulnerable to external shocks and may have had an effect in this case.
Nowhere to hide if debt levels become too heavy
Nils mulled wineKearney partner comments: “While the worst of the pandemic’s fallout has subsided, another issue is impacting zombie companies: an increase interest rates.
“Zombie companies may have been able to avoid significant financial pain due to low borrowing costs, but that is no longer the case. The problem for many zombies is that they do not have large cash reserves. The interest they pay on many of their loans is variable, not fixed. Consequently, this makes higher rates even more painful.
“The stress tests in this edition of our zombie research have made it clear that the situation could be much worse and there is nowhere to hide if debt levels are too high. To avoid filing for bankruptcy, failureor shutting down for good, zombie companies can give themselves a second chance with the right strategy, whether that means restructuring or converting some of their debt into equity.”
Christian FeldmanKearney partner adds: “Given the harsh reality of the economic landscape over the past year, it is not surprising that the number of zombie companies continues to rise, as rising borrowing costs have placed exacerbated financial pressure. The trends in our findings not only reflect the challenges companies face in accessing affordable finance, but also highlight the urgent need for proactive measures to support their resilience.
“It is not enough for these companies to wait for markets to change, and it may be time to evaluate whether it is more advantageous to get out of financial trouble or to go public.”