The rise of the zombie (company) apocalypse

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. Despite 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, because they lure unsuspecting creditors and lenders into a false sense of security, zombie companies have the potential to cause a similar destructive pattern by “attacking and eating” other companies.

During and shortly after the outbreak of the Covid-19 pandemic in 2020, and the subsequent crisis that caused the SA economic landscape to slide, the local economy was awash with companies that had “no more energy” and carried the brunt of the pre-pandemic SA economic status of unemployment, potential downgrades and an economy that had been obliterated by the “nine wasted years” of the Zuma administration.

Then followed the riots in KwaZulu-Natal and Gauteng in 2021. At the time we thought it could not get any worse, but 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 Stats SA, the official unemployment rate was actually 32.9%, and the number of employed increased by 258,000 to 16.2-million in the first quarter compared to the fourth quarter of 2022.

Economic inequality continued to widen in SA during this period, and slow economic growth persisted. Russia invaded Ukraine in February 2022, with a ripple effect felt all over the world.

‘Post-Covid slide’

In SA corruption continued unabated and governance issues in the 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, a slow motion commercial train smash, turned out to be even more disastrous during the post Covid slide.

Companies with debt at already unprecedented levels at the commencement of the first Covid lockdown in 2020 fell deeper and deeper into financial distress during the post Covid slide, and sank into a deeper addiction to the drug of “overindebtedness”.

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 incur further credit by entering into loans at low interest rates.

What was offered to them was a lethal concoction of further debt, lower interest rates and an opportunity to dig themselves into an even deeper hole. The net effect of this is that the financial distress experienced by companies before the pandemic has since turned into a financial disaster, often due to further intentional reckless conduct by its management and directors in direct contravention of the Companies Act.

This frequently occurred under the guise of Covid-19 where they threw caution to the wind and did not take the necessary precautions (especially where their overindebtedness was already known to them).

New disasters

When trading became impossible during the lockdowns of 2020, many companies were already under the influence of overindebtedness and became “zombies”. As the pandemic passed new disasters ensued and unprecedented load-shedding set in.

Interest rates have been rising, and it is estimated that most SA medium-sized 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, where the directors of zombie companies are incurring further debts knowing they will not be able to service them.

The effect zombie 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 need to prevail in times of financial distress, and that the medicine that needs to be taken may not necessarily be palatable.

To embark upon processes such as business rescue or even formal liquidation may produce better outcomes than waiting for the situation to deteriorate to such an extent that there is a complete meltdown, and healthy businesses are consumed by the zombies.