Zombie companies to drive insolvency surge

Global insolvencies are set to rise 33% on pre-pandemic levels, according to economic research by Atradius.

Global insolvencies fell by 14% in 2020 and by a modest 1% in 2021, despite the world economy being plunged into recession. This is a significant downward adjustment to earlier forecasts, suggesting that fiscal support packages have been particularly effective.

However, Atradius warns that the sharp decreases in most countries also suggest potentially many so-called ‘zombie’ companies have been created whose financial situation is too weak to survive once economic circumstances return to normal.

These zombie firms may be able to buy themselves time by running down their cash but Atradius economists expect them to materialise into bankruptcies within the four quarters of fiscal support ending.

In its report, Atradius details that the surge in insolvencies is shaped by three forces.

• First is the delayed effect of bankruptcies that would have occurred in 2020 in the absence of fiscal schemes and changes to insolvency proceedings.
• Secondly, the phasing out of support schemes is expected to trigger an increase of insolvencies towards ‘normal’ pre-pandemic levels.
• The third force is the elasticity of insolvencies to GDP changes, which has been effectively suspended throughout the pandemic to date.

Damien Dawson, southern regional manager, of Atradius UK, commented: “It is simple economics that insolvencies come hand in hand with economic recession which was inevitable as global economies recoiled as the pandemic hit.

”However, governments worldwide were quick to break this correlation and support businesses through the hardest trading period since the Great Depression. As the economy rebounds and support schemes are gradually withdrawn, the escalation of insolvencies is, unfortunately, inescapable.

“The most important thing businesses can do now is to be prepared. In such an uncertain and potentially volatile trading environment, information is critical. Businesses must build up comprehensive insights into buyers and their ability to pay, through real-time monitoring alongside a robust credit management strategy, flexibility to adapt should warning signs arise and non-payment protection.”