Broker Warns Of 'Zombie' Firms After COVID Support Ends

By Martin Croucher
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Law360, London (April 7, 2021, 1:30 PM BST) -- The government could be propping up "zombie companies" through its financial support during the pandemic, insurance company Marsh said Wednesday, warning that there could be a global wave of insolvencies when state aid eventually ends.

The London-based broker said in a report that COVID-19 loans from government and guarantees for insurance companies meant that unprofitable and heavily indebted businesses were being allowed to stay afloat for far longer than they otherwise could.

The government introduced measures at the start of the pandemic, including offering grants to small businesses, subsidized loans, partial payment of staff salaries and guarantees to insurers providing trade credit insurance cover.

"Even before the pandemic, Europe and North America had numerous zombie companies, and their volume is likely to explode amid the impact of COVID-19," Marsh said in its report.

"The number of bankruptcies plummeted during the global recession in 2020, a signal that pandemic relief may be propping up weak businesses," the broker added. "Extending loans and other support to keep zombie companies alive could prolong economic weakness and ultimately result in mass insolvencies."

Insolvency practitioner Begbies Traynor said in January that there had been a 27% increase in the number of companies in financial distress in the final quarter of 2020 compared with the same period in 2019. That was despite the number of court winding up petitions falling 85% in the same period.

Begbies warned that financial support from the government had merely provided a "stay of execution" for struggling businesses.

When the pandemic hit, many insurers initially stopped providing trade credit insurance, which protects businesses against the risk that a supplier cannot fulfill an order, usually as a result of becoming insolvent.

The government introduced a £10 billion ($13.8 billion) guarantee to insurers, which would cover losses beyond a specified level, as it sought to maintain cover for businesses. The scheme was extended at the end of last year, and is now due to end on June 30.

Marsh said on Wednesday that exporters should "find longer-term solutions for credit risks" before the scheme ends. "It's advisable to begin exploring those options sooner rather than nearer the end of state-backed schemes," the company said.

--Editing by Joe Millis.

For a reprint of this article, please contact reprints@law360.com.

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