Race to refinance could kill off hordes of zombie companies

Recent statistics published by Reuters reveal that the first half of 2024 is likely to see a large number of company loans and bonds come to maturation. This is expected to prompt a host of struggling businesses across Europe, Africa, and the Middle East to seek affordable refinancing options before interest rates potentially rise again.

Businesses referred to as zombie companies, that have been dependent on low interest rates and government grants to survive, are set to be hit hard by this though. Favourable loan options may well be difficult to come by for those without a healthy asset base. For companies already on the brink, having to absorb higher rates could be the difference between survival or dissolution.

The race for survival

Businesses looking to find cheaper rates for loans due to mature in 2024 will have to get their affairs in order before scores of their peers have the same idea. While there will doubtlessly be many that don’t act in time to avoid higher rates, it could be that those that get their refinancing sorted early may inadvertently cause higher rates for any stragglers.

UK Banks and other lenders are already weary of exposing themselves to too much SME risk, due to the Bank of England’s plans to raise bank capital requirements and become more stringent on SME lending. If the expected rush for refinancing comes to fruition, banks are unlikely to offer favourable terms to those arriving late to arrange new deals.

Banks to stiffen their stance on lending

Although the Bank of England’s proposed changes won’t be in place until 2025, many lenders have already taken action to pre-empt the tighter ruling. Some have restricted credit terms or even dropped some of their existing SME customers altogether in an effort to tighten their operations before the changes take place. The lending landscape is already tricky to navigate for businesses lacking valuable assets to back their applications up with, with few options outside of the most basic loans available to them.

A perfect storm looms for struggling businesses

There are signs that businesses are already feeling the pinch. August’s number of corporate insolvencies jumped up by 19% compared to last year’s figures according to the Office of Nation Statistics. If rates rise even higher and refinancing becomes trickier, the situation threatens to settle into a dangerous trend that will have scores of companies concerned about their futures.

Unfortunately for zombie companies, the banks’ tighter restrictions are synchronising with private equity firms becoming more reluctant to open themselves up to SME risks too. Add to this the end of the COVID-19 stimulus in terms of loans and grants, and you can see how we may be on the cusp of seeing large swathes of businesses going under.

The situation could scarcely be any worse for distressed businesses, but if we see any more large-scale household names like Wilko and Amigo fall into trouble, the resulting hesitancy to lend could see them fold entirely.