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The number of ASX-listed companies that have shown signs of distress for an extended period of time has risen by 31 per cent over the past six months, with almost half of these 122 so-called "zombie companies" coming from the mining sector while an unlucky 13 per cent are in the technology and telecommunications space.
The latest data from KPMG Australia reveals that the total market capitalisation of zombie companies, which despite their distress are not yet insolvent and continue to trade, has reached $3.1 billion - up 9 per cent since May.
KPMG head of turnaround and restructuring services, Gayle Dickerson, says a combination of factors are behind the increased zombification of the ASX.
"Stubborn inflation, sustained high interest rates and low consumer sentiment have left businesses with little breathing room to keep themselves solvent. These factors are simultaneously biting into profit margins and increasing debt burdens which is turning once stable businesses into zombies," she says.
"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 percent 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."
The mining sector has seen a 51 per cent increase in its zombification and now comprises 48 per cent of all ASX-listed zombie companies, largely driven by the crash in nickel and lithium prices.
After technology and telecommunications, the next-most zombified market segment is the consumer and retail sector with 6 per cent of the total.
"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," says 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."
KPMG notes that sectors that remain immune from zombies include aerospace and defence, agriculture, real estate investment trusts (REITs), manufacturing, and utilities. These sectors have not registered a zombie company in the last six months.
"These sectors appear to have stronger underlying market conditions; however, we have seen stress in the non-listed agriculture and manufacturing space," adds Dickerson.
Beyond the ASX, Zombie companies in the construction sector have been growing rapidly at the SME level.
KPMG Australia partner and turnaround & restructuring services property and construction sector lead, Amanda Coneyworth, says construction business insolvencies are impacting businesses higher up the chain.
"Despite the housing demand in Australia, cost increases and labour constraints are putting enormous strain on builders and developers," she says.
“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.
Despite commercial property values generally remaining resilient in Australia, there is further uncertainty for developers and asset owners in that subsector due to increased costs of debt and perceived risks.
“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,” says Amanda Coneyworth.
Despite a turbulent economic outlook, Gayle Dickerson says there is light at the end of the tunnel for struggling businesses.
“The taming of inflation and the subsequent lowering of interest rates by the RBA, which we anticipate by February next year, will be the best cure of zombification," she says.
“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.”
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