Zombie companies to drive insolvency surge

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

In the UK, contrary to initial expectations, business insolvencies declined 27% in 2020 as a result of fiscal support schemes and anti-bankruptcy measures.

As these measures continued in 2021, buffering businesses from the impact of the pandemic, insolvency rates have been kept artificially low. However, as fiscal support schemes are withdrawn, Atradius expects the long-awaited surge in insolvencies to be on the horizon, peaking in 2022. 

The Insolvency Forecast warns UK business failures will begin to rise in H2 2021, resulting in a year-on-year increase of 7%. In 2022, annual insolvencies are forecast to spike by as much as 70% year on year.

Analysis against a baseline insolvency level in 2019 reveals UK insolvencies will be 33% higher in 2022 than they were pre-pandemic – one of the highest rates in the world.

Only Italy has a higher cumulative insolvency rate with a forecast increase of 34%, followed by the UK and Australia with a forecast increase of 33%.

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.

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 As the economy rebounds and support schemes are gradually withdrawn, the escalation of insolvencies is, unfortunately, inescapable.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.”