'Zombie' Firms Swell in Ranks, Survival Uncertain

These businesses, known as "zombies," are so deeply indebted that they can barely make ends meet, pay back the interest on their loans, and frequently only one bad business decision away from going out of business forever.

According to an Associated Press research, these firms have increased to around 7,000 globally, with 2,000 based in the United States alone. This growth has been fueled by years of cheap debt accumulation followed by persistent inflation, which has driven borrowing prices to ten-year highs.

With due dates approaching on hundreds of billions of dollars in loans that they might not be able to repay, many of these primarily small-and mid-sized walking wounded may soon face their day of reckoning.

Companies that have not generated enough revenue from their activities over the last three years to cover even the interest on their debts are usually referred to as zombies.

The Surge in Zombie Companies and Their Economic Impact

According to AP's analysis, these companies, which operate Carnival Cruise Line, JetBlue Airways, Wayfair, Peloton, Italy's Telecom Italia, and British soccer powerhouse Manchester United, have seen their ranks in raw numbers soar by at least a third over the past ten years in Australia, Canada, Japan, South Korea, the United Kingdom, and the United States.

Although there have indeed been more businesses overall over the previous ten years, which makes comparisons challenging, zombies have climbed by about thirty percent even when the analysis is restricted to businesses that were there ten years ago.

These include food and utility corporations, IT firms, owners of chains of hospitals and assisted living facilities whose poor financial standing hindered their ability to respond to the pandemic, and real estate companies grappling with partially vacant office buildings in the middle of big cities.

The potential harm if they are forced to declare bankruptcy or close their doors permanently has increased along with the number of zombies. In a dozen nations, the companies included in the AP's investigation employ at least 130 million people.

At a 14-year high, the number of American company bankruptcies is already more than predicted during a recession rather than an upswing. The United Kingdom, France, Spain, Canada, and the United States have all had recent highs in corporate bankruptcies of at least ten years.

Although sporadic defaults and bankruptcies might still hurt the economy, some analysts believe companies may be able to avoid layoffs, business unit selloffs, or collapse if central banks decrease borrowing rates, which the European Central Bank started doing this week. Some believe that the epidemic temporarily increased the number of zombies.

Wall Street, for its part, is not in a panic. Some zombie stocks and associated "junk bonds," or loans that rating agencies believe are most likely to default, have attracted the attention of investors. Zombies may be able to raise money in the short term, but investors who buy these instruments and drive up their values risk suffering significant losses in the long run.

The Risks of Excessive Borrowing in a Low-Interest Era

While interest rates were falling, credit rating organizations and economists cautioned for years about the risks associated with corporations taking on debt. However, the warnings gained significant traction when central banks worldwide slashed benchmark rates to almost zero during the global financial crisis of 2009 and again during the 2020-21 pandemic.

It was a massive, unheard-of experiment to ignite a borrowing frenzy that might prevent a global slump. Cheap interest rates encouraged excessive borrowing by governments, households, and larger, stronger firms, and it also generated what some economists described as a credit bubble that expanded beyond zombies.

Many zombies lack large cash reserves, and since the interest on many of their loans is variable rather than fixed, higher rates are currently harming them. Most concerningly, zombie debt was frequently used to repurchase company shares rather than grow, add staff, or make technological investments.

To offset the cost of additional shares, which are frequently issued to increase CEO and other top executive compensation and retention packages, corporations can "retire" or remove shares from the market through these so-called repurchases.

However, an excessive number of share buybacks can deplete a company's funds, as was the case with Bed Bath & Beyond. The retail business, which formerly had 1,500 locations, suffered for years from a difficult shift to digital sales and other issues, but a major factor in its demise was its excessive borrowing and decision to spend $7 billion on buybacks over the course of ten years.

If customers, governments, and bigger, more stable businesses could provide a buffer against zombie collapses, then zombie collapses wouldn't be as terrifying. However, they also accrued debt.

The interest on the nation's debt is estimated to cost the U.S. government $870 billion this year, up 33% from the previous year and more than defence combined. Credit cards and other household debt have reached all-time highs in South Korea, leaving people tapped out. Homeowners in the UK are falling behind on their mortgage payments at a rate that hasn't been seen in years.

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