CEO warns of "zombie companies"

by Madison Utley13 Aug 2020

While new data from a digital credit agency seems to have confirmed ‘green shoots’ are appearing within the economy, the group’s head has warned against premature relief. 

The figures out of CreditorWatch revealed that from June to July 2020, the number of businesses defaulting on payments fell by 13.2% and the average days to payment decreased by 7.6% across all sectors.

“While at first glance, a decrease in business administrations, defaults and payment times seems to indicate green shoots appearing in our economy, we should be cautious,” said Patrick Coghlan, CreditorWatch CEO.

“Payment times remain high, indicating significant cash flow issues, whilst the number of companies going into administration is far below the monthly average we would expect, telling us that many firms are being artificially propped up.”

The fact payment times are 224% higher year on year, and yet there was an 11.6% fall in the number of business administrations in July, shows how much the economy is relying on external assistance such as government measures, according to Coghlan. 

Given the “historic run of low administration rates” beginning in April, he estimates that thousands of companies that would have ordinarily gone into administration have avoided doing so.

“Until now, the priority has been to keep as many businesses as possible above water,” Coghlan said.

“The extension of JobKeeper measures to March 2021 and the mooted extension of Safe Harbour measures, including high limits on the amount of debt that SMEs can incur whilst still trading, will keep SMEs afloat. We may even see further falls in credit defaults and payment times, but it would be premature to call these green shoots.”

While grim, Coghlan has called on creditors and policymakers to prepare for a “sharp market re-adjustment” when government support ends.

He said, “The number of ‘zombie companies’ – those being kept out of administration artificially – continues to grow and policymakers need to consider the gradual easing of measures to ensure good money is not being thrown away on bad companies.

“Just as investors are watching listed companies closely during the reporting season to ensure they are not hiding behind government payments, creditors need to be keeping close tabs on SME market confidence and are working with debtors to build sustainable cash flow,” Coghlan concluded.