Icelandic companies are highly indebted by international standards.

The Competition Authority has published a report. No. 3/2012, Corporate Recovery 2012 – Zombies or the Undead?. It has been covered in the media yesterday and today. The report is a follow-up to the regulator's report. No. 2/2011, Competition after the crash, which was published in June 2011. Both reports are based on the Competition Authority's research into the financial position and financial restructuring of 120 large companies in selected markets, which account for around half of the turnover of all Icelandic companies.

In 2011, the financial restructuring of companies within the banking system gained momentum. The restructuring of numerous larger companies has been completed, and in many cases, sales have been finalised. According to the Competition Authority, the banks' dominance over companies has significantly diminished, although it remains considerable.

Icelandic companies are highly indebted by international standards. Notably, the debts of companies where restructuring has been completed remain generally very high. Around a third of the managers of larger Icelandic companies that have been sold or have undergone restructuring believe that their companies cannot cope with their current debt burden, or that it is uncertain whether they can.

The Competition Authority believes that high levels of corporate debt pose a variety of risks. A highly indebted company will be unable to act as a check on its competitors or operate efficiently in the market. There is a risk that such a company will set the price of a product or service in accordance with its poor debt position, if it has the opportunity to do so. This risk is all the greater the less competition there is in the market in which the company operates and the greater its market share.

It is important that the debts of companies with a solid operational foundation are adjusted to their solvency and ability to generate a reasonable profit. A healthy business sector is the foundation upon which the growth and prosperity of the banks must inevitably depend. An over-indebted business sector is therefore incompatible with the long-term interests of both the banks and the economy.

The Competition Authority intends to focus its attention in the near future, in particular, on two areas in connection with the supervision of corporate restructuring; on the one hand, monitoring the profitability targets of companies under bank control, and on the other, ensuring that banks' de facto control over companies is brought to light.

Profitability conditions are intended in particular to reduce the risk of banks financing costly market expansion that enables the acquired company to capture an increased market share in the relevant market and even eliminate the company's competitors.

However, the Competition Authority has recently been examining in several cases whether banks have acquired control of companies in accordance with competition law. This is a particularly important question at present, given the high level of corporate indebtedness and the ability of banks to influence the operations of indebted companies through the terms of loan agreements and acceleration clauses. The Competition Authority will continue its investigations into this.