One in 14 (7%) companies in Wales may just be paying the interest on its debts, rather than repaying the debt itself, according to indicative research from insolvency and restructuring trade body R3.

Only being able to pay the interest, not the original debt itself, is one potential sign of a so-called ‘zombie business’ – a company which is only surviving thanks to low interest rates but which otherwise might not be viable.

Zombie businesses are often linked to lower levels of productivity within an economy, as they do not have the available capital to invest in new operations, products, or services, while the investment tied up in them is denied to other, nimbler companies.

In more positive news, other signs of financial distress in Wales’s businesses appear to be less widespread than in the UK overall. Around one in 12 (8%) of companies in Wales report having to negotiate payment terms with creditors, compared to 16% for the UK overall, while only around one in 20 (4%) Welsh companies report they could be unable to repay their debts if interest rates were to rise by a small amount, half as low as the UK figure (8%).

Philip Winterborne of R3’s Wales and South West Committee, and Insolvency and Turnaround partner at Temple Bright solicitors, says:

“Tougher trading conditions and much uncertainty over the future of the economy have contributed to a significant chunk of businesses finding themselves stuck in ‘zombie business’ mode.

“These businesses are capable of ticking along, but growth and increased productivity improvements are out of their reach for the time being. This means thousands of businesses are stuck in a position where they’ll struggle to deal with external shocks, which could present a problem if they all were to become insolvent at the same time.”

Philip adds:

“R3 members in Wales have reported that economic uncertainty is contributing to businesses treading water, with some building up stock to safeguard against future risks – such as the UK leaving the EU without a deal. Investing in the stockpile puts pressure on cashflow and investment in other areas, while large stockpiles will take time to turn back into cash and are at risk of obsolescence.

“The future for these ‘zombie businesses’ is mixed. Some might eventually be able to restructure or find new investment, and grow. Others will run out of road and become insolvent. While this would mean capital could be ‘recycled’, it may also be a bit of an economic shock in itself.”

Positively, the UK’s insolvency and restructuring framework is highly rated by the OECD for its zombie-busting powers, and the Government recently announced plans to improve the UK’s business rescue and restructuring options.

Philip Winterborne comments:

“While they still need a lot of work, the Government’s insolvency reform proposals could give insolvency practitioners more tools to help turn around struggling companies, and boost productivity.

“If anyone is running a business and worried that it could be classed as a ‘zombie’, don’t despair – there are potentially options out there for turnaround and transformation, while talking to a qualified and regulated business advisor could be a crucial first step.”