An Associated Press analysis shows that the number of publicly traded “zombie” companies – those so indebted that they struggle to pay even the interest on their loans – has soared to nearly 7,000 in the world, including 2000 in the United States.
And many of them could soon face reckoning day, with looming deadlines on hundreds of billions of dollars in loans that they may not be able to repay.
“They’re going to get crushed,” Robert Spivey, chief executive of Valens Securities, said of the weaker zombies. Decryption.
What is a zombie company?
Zombie companies are generally defined as companies that have failed to make enough money from their operations over the past three years to even pay the interest on their loans. Their numbers have increased because low interest rates in recent years have allowed companies to accumulate lots of cheap debt, only to be hit by stubborn inflation that has pushed borrowing costs to unprecedented levels for ten years.
Associated Press (AP) analysis finds their raw numbers have increased by a third or more over the past decade in Australia, Canada, Japan, South Korea, the United Kingdom and the UNITED STATES.
Many zombie companies don’t have significant cash reserves and the interest they pay on many of their loans is variable, not fixed, so rising rates are hurting them right now.
Why is this worrying for the economy?
The number of zombies has increased, as has the potential damage if they are forced to file for bankruptcy or close their doors permanently. The companies analyzed by The Associated Press employ at least 130 million people in a dozen countries.
The number of U.S. business bankruptcies has already reached its highest level in 14 years, an increase expected during a recession, not an expansion.
In Canada, the United Kingdom, France and Spain, business bankruptcies have also recently reached near-decade highs or more.
In the first months of the year, hundreds of zombies refinanced their loans as lenders opened their wallets in anticipation of an interest rate cut by the Federal Reserve in March. That new money has helped the stocks of more than 1,000 zombies analyzed by the AP rise 20% or more over the past six months.
But many have not been able or able to refinance, and time is running out.
Throughout the summer and into September, when many investors now expect the Fed’s first and only interest rate cut this year, zombies will have to repay $1.1 trillion in loans, according to AP analysis, or two-thirds of the total due by the end of the year.
Some experts say zombies could avoid layoffs, sale of business units or collapse if central banks cut interest rates quickly, although scattered defaults and bankruptcies could still weigh on the economy .
For its part, Wall Street is not panicking. Investors bought shares of some zombies and their junk bonds (called junk bonds in English), that is to say the loans that the rating agencies consider to be the most exposed to the risk of default.
While this may help zombies provide short-term liquidity, investors who pump money into these stocks and drive up their prices risk suffering big losses.
“If rates stay at this level for the foreseeable future, we will see more bankruptcies,” said George Cipolloni, a fund manager at Penn Mutual Asset Management. “At some point the money comes due and they won’t have it anymore. It’s the end of the game. »
How Stock Buybacks Hurt Zombies
Ratings agencies and economists have warned of the dangers of corporate debt for years as interest rates fell. But central banks around the world provided a boost by cutting benchmark rates to near zero, during the 2008-2009 financial crisis and then again during the 2020-2021 pandemic.
It was a massive, unprecedented experiment aimed at triggering a borrowing frenzy that would avert a global depression. It also created what some economists called a credit bubble that spread far beyond the zombies, with low rates also incentivizing governments, consumers and larger, healthier businesses to borrow massively.
What sets many zombies apart is that their debt is not used to expand, hire or invest in technology, but to buy back their own shares, for example.
These buybacks allow companies to “remove” shares from the market, to compensate for new shares created for senior executives to increase their compensation. But too many share buybacks can deplete a company’s cash flow.
This is what happened when Bed Bath & Beyond went bankrupt. The chain that operated 1,500 stores struggled for years, but its heavy borrowing and decision to spend $7 billion over a decade on stock buybacks played a key role in its downfall. Compensation for three top executives topped $140 million, according to data firm Equilar, even as the company’s stock fell from $80 to zero. Tens of thousands of workers in the United States lost their jobs as the chain spiraled into bankruptcy.