By Hans Klopper
ChatGPT describes a Zombie company as a business entity that is highly indebted and unable to generate enough profits to cover its interest payments and operational expenses. In spite of being financially distressed and essentially insolvent, these companies continue to operate with the help of external support, such as loans, bailouts, or government assistance.
The term "zombie" is used metaphorically to describe these companies because, like zombies in popular culture, they appear to be alive but lack vitality and sustainable economic prospects. Their existence is sustained primarily through external interventions rather than their own productive activities.
Zombie companies typically struggle to adapt to changing market conditions or face fundamental problems within their business models.
They may continue to operate by refinancing their debt, negotiating extended payment terms, or receiving financial lifelines from investors or the government. These measures prevent their insolvency or bankruptcy, but they often hinder the reallocation of resources to more productive uses in the economy.
In relation to humans, the Cambridge dictionary of a zombie is “a frightening creature that is a dead person who has been brought back to life, but without human qualities. Zombies are not able to think, and they are often shown as attacking and eating human beings”.
Like these human zombies, zombie companies, because they lure unsuspecting creditors and lenders into a false sense of security, could potentially cause a similar destructive pattern by “attacking and eating” other companies.
During and shortly after the pandemic in 2020 and the subsequent crisis that caused the South African economic landscape to slide, our local economy was awash with companies that had “no more energy” and carried the brunt of the pre-pandemic South African economic status of unemployment, potential downgrades and an economy that had been obliterated by the Zuma years.
Then followed the riots in KwaZulu-Natal and Gauteng in 2021, at the time we thought it could not get any worse, it did. During June 2020 at the height of the pandemic it was anticipated that our unemployment rate could reach 30.1%, in the first quarter of 2023. According to StatsSA, the official unemployment rate was actually 32.9% and the number of employed persons increased by 258 000 to 16.2 million in the first quarter of 2023 compared to the fourth quarter of 2022.
The economic inequality in South Africa continued to widen during this period and slow economic growth persisted. The Russians invaded Ukraine in February 2022 with a ripple effect felt all over the world.
In South Africa corruption continued unabated and governance issues in government continued to have a negative effect on public finances. Infrastructure continued to erode, and our electricity woes became an electricity crisis. I call this the “post-Covid slide”.
During all these events Zombie companies worsened the situation by taking advantage of promised government bailouts and payment holidays from banks and other financial institutions. What was already a bloodbath in the making before the onset of the pandemic, and being a commercial accident waiting to happen, turned out to be even more disastrous during the post-Covid slide.
Companies with debt at already unprecedented levels at the commencement of lockdown in 2020 fell deeper and deeper into financial distress during the post- Covid slide and sunk into a deeper addiction of the drug called “over indebtedness”.
The lowering of interest rates and extraordinary sympathetic market conditions at the time opened the door for zombie companies to take advantage of the situation and to incur further credit by entering into loans at low interest rates.
What was offered to them was a legal concoction of further debt, lower interest rates and an opportunity to dig themselves into an even bigger hole. The net effect of this is that the financial distress experienced by companies before the pandemic has since turned into a financial disaster probably due to further intentional reckless conduct by its management and directors in direct contravention of the Companies Act. This could have occurred under the guise of Covid-19 where they threw caution to the wind and did not take the necessary pre-cautions (especially where their over indebtedness was already known to them).
When trading became impossible during lockdown in 2020, many companies were already under the influence of over indebtedness and became “zombies”. As the pandemic passed new disasters ensued and unprecedented load shedding set in. Interest rates are on the rise, and it is estimated that most South African medium enterprises are under severe strain and are in the process of drawing on their last remaining resources.
Many companies may be trading under insolvent circumstances and under circumstances where directors of such zombie companies are incurring further debts knowing that they could not repay such debt.
The impact that zombie firms and companies will have on healthy businesses can only be curtailed by using the available tools that are in existence in legal frameworks provided by the business rescue provisions in terms of the Companies Act and the formal laws of insolvency.
The biggest challenge to restructuring professionals is to create the understanding with businesses that cooler heads are needed to prevail in times of financial distress and that the necessary medicine to be taken may not necessarily be something palatable.
To embark on processes such as business rescue or even formal liquidation may be a better outcome than to wait for the position to deteriorate to such an extent where there is a complete meltdown and healthy businesses are completely consumed by the zombies.
Hans Klopper, national head of business restructuring at BDO.
BUSINESS REPORT