KPMG Australia has revealed that over the last six months, the number of zombie companies – which the firm described as exhibiting indicators of financial distress for an extended period of time but are not yet insolvent and continue to trade – has jumped 30 per cent.
In terms of market capitalisation the increase was considerably lower, however the 9 per cent increase over the six-month period to September saw the figure go from $2.9 billion to $3.1 billion.
“Stubborn inflation, sustained high interest rates and low consumer sentiment have left businesses with little breathing room to keep themselves solvent,” said KPMG head of turnaround and restructuring services, Gayle Dickerson.
“These factors are simultaneously biting into profit margins and increasing debt burdens which is turning once stable businesses into zombies.
“In prior years the increase in zombie companies was largely due to the removal of COVID stimulus which had propped up many businesses. Now, insolvency appointments are 50 per cent higher than pre-COVID levels, which is a symptom of more challenging market conditions.
“Safe harbour legislation has provided boards of some listed companies with more time to work through restructuring options, however we have still seen some failures in recent months.”
According to the firm, the mining sector is the most contagious as the number of zombie companies jumped 51 per cent from 39 in March 2024 to 59 in September.
Indeed, it is the most zombified sector by a large margin, making up 48 per cent of the total number of zombie companies on the ASX, with KPMG attributing this in large part to the crash in nickel and lithium prices.
Technology and telco companies had the second largest number of zombies at 16, making up 13 per cent of zombies, while the consumer and retail sector was third with seven zombies, making up 6 per cent.
“Many companies in the tech sector are loss-making, so with interest rates remaining elevated many are finding it challenging to raise capital to fund operations as investors seek less risky assets,” said Dickerson.
“The continued pressure on consumer spending is really starting to put pressure on the retail and consumer sector, and we expect this contraction in wallet spend to remain for the short to medium term.”
On the other end of the spectrum, the aerospace and defence, agriculture, REITs, manufacturing, and utilities sectors have not registered a zombie company in the last six months.
Construction insolvencies could see zombies ‘higher up the chain’
According to KPMG Australia construction sector lead, Amanda Coneyworth, smaller construction firms in the SME range have been rife with zombies, which could potentially flow through to the ASX level.
“Despite the housing demand in Australia, cost increases and labour constraints are putting enormous strain on builders and developers,” Coneyworth explained.
“Risks in the subcontractor market are impacting the profitability of builders and developers up the chain which if not rectified will potentially see larger construction companies tip into zombie territory. To avoid this, developers and builders need to work closely with their subcontractors, lenders and other stakeholders to proactively mitigate risks associated with costs increases and delays to complete developments.”
She said that increased costs of debt and other perceived risks are creating more uncertainty for developers and asset owners in the subsector, even as commercial property values have largely remained resilient.
“Retail vacancies have been increasing quarter to quarter consistent with the overall weakening of retail trade, so this is a subsector to keep an eye on for further zombification,” said Coneyworth.
Dickerson added that the downward trend for inflation and the expected lowering of interest rates early next year could be the “best cure of zombification”.
“It does take time for the effects of interest rate drops to filter through the economy, but for businesses struggling there are still a raft of options available like safe harbour laws and private credit that simply didn’t exist in previous downturns,” she said.
