New research from leading global management consultancy Kearney reveals that the number of zombie companies in the energy industry fell 13% in 2022, dropping from 3.9% in 2021 to 3.4%. This is despite a 5% increase in the global share of zombie companies across all industries.
The OECD defines zombie companies as those that are unable to meet interest obligations with operating profit for three years running. Kearney analysed 70,000 globally listed enterprises across 180 industries and 153 countries with its Dawn of the Debt research: Will higher interest rates doom more zombie companies?. It found that the energy industry has defied the global trend, instead seeing these types of companies fall as a share of the sector.
While 2022 was a turbulent year for energy companies, marked by the invasion of Russia into Ukraine and the subsequent reshuffling of the global energy landscape, soaring energy prices have ultimately supported highly leverage companies in the industry. The most substantial percentage decrease in zombie companies can be observed within the electricity supplier segment, with a decrease of nearly 45%.
Heightened vulnerability to interest rate hikes
Despite this decline in zombie companies in the energy sector in 2022, an in-depth analysis of the energy and utilities industry reveals its susceptibility to the effects of interest rate hikes. In the event of further interest rate increases, the industry would experience a significant rise in the proportion of zombie companies. If interest rates were to increase by a factor of 1.5, the share of zombies would grow to 4.3% of the energy industry, while an increase by a factor of 2 would result in a further rise to 4.5%. This indicates a substantial increase of nearly 50% compared to the industry’s baseline.
Commenting on this, Kearney partner and managing director, Nils Kuhlwein, said: “It is unsurprising, but welcome, to see that the energy and utilities industry is one of the few industries where the number of resurrections exceeds the number of new zombie firms. However, affected companies should be concerned by the potential impact of future interest rate rises, and use the breathing space provided by higher profits to ensure they are able to service their debt obligations over the longer-term.”
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Kearney partner, Benedikt Frank, concluded: “The health of the energy and utilities industry is central to the broader health of the European and global economy. The stress tests carried out by Kearney should therefore be a wake-up call to business leaders in this industry, who need to ensure their organisations are resilient enough to withstand interest rates rising beyond their current levels. That being said, it is positive to see that the number of zombie companies in the energy industry has come down over the last year, giving businesses the best possible chance to prepare for the future.”