It's Halloween. It's time for a fright! And so Swiss Re decided to do just that.
Some headlines catch my attention, and when Swiss Re launched a report about Zombie Businesses the other day, well … I had to read it.
The report, after the headline, is less explosive, and is all about corporate debt:
“The sharp reduction in corporate default rates in recent years has seen a rise in the number of zombie firms. We estimate that as of end-2021, zombie firms made up 20% of the US stock market. We expect a reversal of the trend as interest rates rise and as cash buffers built during the pandemic erode, which will see zombie firms default. Zombie companies face three major headwinds.
“First, major central banks are continuing to raise interest rates to fight persistent inflation, which will also have the effect of lowering aggregate demand. Reduced demand in an environment of inflationary recessions means less revenues for many companies, and thus less cash for zombie firms to pay down their own debt.
“Second, zombie firms were already struggling to make interest payments when rates were low. Higher financing costs will only amplify this challenge.
“And lastly, lending to zombie companies is less attractive to banks and credit investors, as they can now benefit from higher rates by lending to higher-quality firms and still reap profits.”
But the key headline stat that stood out for me is that up to 5% of firms will go bust this year, or even more. To be honest, that might be a conservative forecast, as we have entered a world of recession on the back of a major global shock, called a pandemic. In other words, the 2020s have been pretty bad so far.
Now, I’m not an economist but I wanted to see what the future looked like, so I looked for an economist who might know and up came the IMF (the International Monetary Fund) who state that: “global inflation [will] rise from 4.7 percent in 2021 to 8.8 percent in 2022 but to decline to 6.5 percent in 2023 and to 4.1 percent by 2024”.
What does this mean? Inflation doubles this year … what does that mean?
Well, obviously everything costs much more, which is why at least 1 in 20 companies go bust.
What can you do to avoid your company, or your home, going bust?
As always, you probably know this, but there are basics. Try as hard as you can to sell what you can do; avoid investing or buying anything you don’t need; don’t hire and, if needed, fire; and so on. But the most important thing to remember is network, network, network.
I learnt this late in life, when made redundant myself – the best thing that ever happened to me – which made me search my soul and try harder. I did that and, in this year of cut-backs, lay-offs and hard times is what we all need to do. Try harder.
It challenges everyone to do this and I know, from experience, that friends are going through hard times. If you are one of them, keep in mind one thing. One thing. Things will only get better.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...
