The UK tops the league table that no-one wants to lead

25 May

The UK tops the league table that no-one wants to lead

The UK has the dubious honour of having more zombie companies than any other country in Europe, according to analysis by Debtwire.

These walking dead are defined as companies with an average interest coverage ratio (ICR) below 1.5x. In other words, below the level where one year of earnings would cover 18 months of interest payments on outstanding loans and bonds—and no company wants to struggle to service their debt.

This analysis also screened for companies with a market cap above €100 million (so any prospective baby zombie apocalypse is not included here) and whose projected EBITDA for 2021 is 25% lower than in the simpler times of 2019.

All told, 82 companies meet these criteria, 24 of which live in the UK.

The UK has two forces working against it: COVID-19 and Brexit. Repeated lockdowns have already hammered the service industry in particular—unsurprisingly, the consumer services sector accounts for 43% of all companies in Europe's zombie mob.

Rising inflation may also be pinching consumer purses—in the UK, this has been exacerbated by Brexit as supply disruptions add to already rising costs.

Golden ratio

Of course, the UK was always bound to top this particular league table. The country has more listed companies than any other in Europe. The Euronext—which encompasses markets in Amsterdam, Brussels, Dublin, Lisbon, London, Milan, Oslo and Paris—had nearly 1,900 listed issuers as of May 2021. The London Stock Exchange alone has 1,986, albeit not all of these are Britcos.

Closer inspection also reveals that, despite having more ailing companies, these UK stragglers are actually in much better shape than their continental counterparts. The expected average ICR for the Brit cohort in 2021 is -1.6x. For France, Germany and the Netherlands, the average is below -4.2x, while across Europe it is -2.6x. In that sense at least, the situation is not so bad.

Numbers lie

The challenge when doing this sort of analysis is knowing how much store to put in forecast financials. In 2019, ratings agency S&P found that only 16.75% of companies on the S&P 500 index that issued quarterly earnings guidance in 2018 went on to achieve results within that range. And the number of companies within their guide range has fallen every year since at least 2014.

The pandemic has hardly made this easier. Vacillations in profits have made for a wild ride on the stock markets over the past 12 months due to the stop-start of lockdowns. Volatile and unpredictable macro data amid the ongoing economic restart is throwing investors for a loop. The true picture has yet to reveal itself.

The UK tops the list of European zombie companies