Post # 946

Beware The Zombie Client!

Inflation hit a new 40-year high of 8.6% in May. High inflation has forced the Federal Reserve into what will likely be the fastest series of interest rate hikes in three decades. Expect them to raise interest rates by AT LEAST another 2 percentage points this year. By raising borrowing costs aggressively, they hope to curb inflation. It promises to be an extremely difficult balancing act.

In an earlier post titled The Inflation Tsunami, I warned “Identify those existing clients whose inflation impacted financial position could adversely affect YOUR firm’s business. Not every client is a client worth having. Working capital, the selection of clients and client relationships must be managed far more carefully.”

Law Firms have been riding high on a post-pandemic wave of unprecedented financial success. But today, America’s ZOMBIE Companies have now racked up $1 trillion in debt; aren’t earning enough to cover their interest expenses let alone make a profit; and are at high risk of insolvency or abrupt implosion as these interest rates rise. Zombie companies are at least 10 years old. Think American Airlines and Carnival Cruises, massive companies propped up by name recognition and a friendly lending environment, that were once America’s case studies in success and the most desired of law firm clients.

According to a Bloomberg analysis of financial data from 3,000 of the country’s largest publicly-traded companies, Zombies now account for nearly 20% of those firms (and perhaps your current clients). Their numbers have been increasing for over a decade, fueled by years of ultra-loose monetary policy. Zombie companies get their nickname because of their tendency to limp along, unable to earn enough to dig out from under their obligations, but still with sufficient access to credit to roll over their debts. Soaring inflation coupled with rising interest rates may be just enough to push a wave of Zombies from undead to dead dead!

From an INDUSTRY perspective, one of Thomson Reuter’s analysts identifying areas ripe for growth during a downturn, claimed that Real Estate was an area where firms should focus.” I DISGAREE. The real estate industry had the highest absolute number of zombies. In commercial real estate, April’s 16% decline in sales marked an abrupt turn from March and had a number of economists saying “the speed of that transition is shocking.” Other investors are walking away from large deals already in contract. And as firms fight to acquire Private Equity Industry expertise, deal making has slowed. Exit activity stalled from the 2021 frenzied pace. PE investors face a much more difficult environment moving forward, exemplified by less liquidity and an increased focus on valuation by buyers.

Now:Focus on certain INDUSTRY clients that are profitable and more inflation proof.


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