Zombie companies will at some time need to confront three fundamental problems before they can achieve growth: 1. how to fund growth; 2. how to repay debt; and 3. how to service interest when rates rise.
Provided that a zombie company can generate profits on an EBITDA basis (earnings before interest, taxes, depreciation, and amortization), it has a number of options for resolving these problems as a pre-requisite for growth.
Options include negotiating a partial debt write-off, a pre-pack sale via Administration or a Company Voluntary Arrangement (CVA).
From the suppliers’ viewpoint a growing business offers the prospect of increased profits from increased supplies. From the existing lenders’ viewpoint profitable growth means that non-performing debts can be repaid. From a new investor’s viewpoint, new money can be used to fund growth rather than replace existing debt. From the company’s viewpoint growth inspires confidence in the future prospects of the business.
Given the benefits, it makes sense for zombie companies to get help from restructuring experts who are familiar with these options.