KPMG Australia has revealed that over the past six months the number of zombie businesses – which the firm described as exhibiting indicators of financial distress for a prolonged period but which are not yet insolvent and continuing to trade – has jumped by 30 percent.
In terms of market capitalization, the increase was considerably smaller, but the 9 percent rise in the six months to September saw the figure rise from $2.9 billion to $3.1 billion. dollars.
“Stubborn inflation, continued high interest rates and low consumer confidence have left companies with little room to remain solvent,” said Gayle Dickerson, head of recovery and restructuring services at KPMG.
“These factors simultaneously squeeze profit margins and increase debt burdens, turning once-stable businesses into zombies.
“In previous years, the increase in zombie businesses was largely due to the removal of COVID-related stimulus measures, which had propped up many businesses. Today, insolvency appointments are 50% higher than before COVID-19, which is a symptom of more difficult market conditions.
“The safe harbor legislation has given the boards of some listed companies more time to explore restructuring options, but we have still seen some failures in recent months.”
According to the company, the mining sector is the most contagious as the number of zombie companies jumped 51%, from 39 in March 2024 to 59 in September.
Indeed, it is by far the most zombified sector, accounting for 48 per cent of the total number of zombie companies on the ASX, with KPMG attributing this largely to the collapse in nickel and lithium prices.
Technology and telecommunications companies came in second with 16 zombies, or 13 percent of the zombies, while the consumer and retail sector came in third with seven zombies, or 6 percent.
“Many companies in the technology sector are loss-making, so with interest rates remaining high, many are struggling to raise capital to finance their operations as investors seek less risky assets,” Dickerson said.
“Continued pressure on consumer spending is really starting to put pressure on the retail and consumer sector, and we expect this contraction in wallet spending to continue in the short to medium term.”
On the other end of the spectrum, the aerospace and defense, agriculture, REITs, manufacturing, and utilities sectors recorded no zombie companies in the past six months.
Construction sector insolvencies could see zombies ‘higher up the chain’
Smaller construction companies in the SME category are rife with zombies, which could potentially spread up to the ASX level, according to KPMG Australia construction sector leader Amanda Coneyworth.
“Despite the demand for housing in Australia, rising costs and labor constraints are putting enormous pressure on builders and developers,” Coneyworth explained.
“Risks in the subcontracting market are impacting the profitability of builders and developers up the chain and, if not addressed, large construction companies could tip into zombie territory. To avoid this, developers and builders must work closely with their contractors, lenders and other stakeholders to proactively mitigate the risks associated with cost increases and delays in the completion of developments.
She said rising debt costs and other perceived risks are creating more uncertainty for developers and asset owners in the subsector, even as commercial property values have remained largely resilient.
“Retail job vacancies increased quarter over quarter, consistent with the general weakening of retail. So this is a sub-sector to watch for further zombification,” Coneyworth said.
Dickerson added that the downward trend in inflation and the expected drop in interest rates early next year could be the “best cure for zombification.”
“It takes time for the effects of lower interest rates to trickle through the economy, but for struggling businesses, there are still a host of options available, like safe harbor laws and private credit, which simply did not exist in previous recessions,” she said. .
