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New report highlights problems with ‘zombie’ firms in Scotland

19 May 2019 Written by Yuill & Kyle Solicitors Category: Blog

A new report published by KPMG shows that one-in-ten Scottish firms show "zombie-like symptoms". But what does this mean and are 'zombie' firms a risk to other businesses?

The recent study by KPMG showed that 9% of the 1100 firms analysed in Scotland were under financial pressure. These so-called zombie firms suffered several difficulties, including static turnover, a decline in turnover, tight margins, limited ability to invest and high levels of debt. This figure was the highest of all UK nations.

KPMG warned that companies suffering these symptoms were likely to case "a significant drag-effect" on the economy.

The analysis was based on the last three annual accounts of UK listed companies with a turnover of £10.2m or more for each of the previous three years. It also revealed that in Scotland, the highest number of zombie firms were found in the education sector (29%), closely followed by mining and extraction (26%) with real estate (22%) and automotive (21%) also showing significant concentration.

KPMG suggested that the high concentration in companies linked to education was the result in part of "ongoing pressures" to balance books amid falling international student numbers in the face of Brexit. It also noted that the supply chain in the oil and gas sector in Scotland had struggled to recover from "significant cost and pricing pressures" as well as low levels of capital expenditure projects in the North Sea.

In the real estate sector, occupancy levels are lower, rents have declined, and the value of property in the retail industry has fallen, which were all identified as factors which may have had a significant impact on businesses in the sector.

UK Head of Restructuring at KPMG, Blair Nimmo said:

 "For the past decade, zombies have been allowed to sleepwalk largely undisturbed, thanks to an extraordinary monetary and political environment, coupled with lenders exhibiting greater creditor forbearance to struggling companies in their portfolios.

"The uncomfortable truth, however, is this environment is unlikely to persist indefinitely.

"In the event of a liquidity squeeze, many of these underperforming businesses would fail - and if this happens, the potential for contagion is very real, creating broader challenges for an economy already struggling to deal with a plethora of issues."

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