The rise of zombie companies, firms shackled by heavy debt burdens and struggling to cover even the interest on their loans, has emerged as a pressing concern in today’s global economic landscape. An in-depth analysis by the Associated Press (AP) has unveiled a startling increase in the number of these zombies, with nearly 7,000 publicly traded companies worldwide falling into this precarious category, among which 2,000 are situated in the United States alone. These companies, once buoyed by years of accumulating cheap debt, now find themselves teetering on the edge of financial collapse as borrowing costs soar to decade highs amidst persistent inflationary pressures.
The looming specter of default casts a long shadow over many of these firms, with due dates fast approaching on hundreds of billions of dollars in loans that they may simply be unable to repay. Robert Spivey, Managing Director at Valens Securities, starkly warns that the weakest zombies are likely to face dire consequences, a sentiment echoed by Miami investor Mark Spitznagel, who ominously asserts that “the clock is ticking” for these financially beleaguered entities.
Zombies, typically defined as companies failing to generate sufficient operational revenue in the past three years to cover the interest payments on their loans, have seen their numbers surge across a diverse array of sectors and countries. From utilities and food producers to tech companies and real estate firms, these entities represent a broad spectrum of industries, each grappling with its unique set of challenges exacerbated by the weight of excessive debt.
The proliferation of zombie companies poses significant systemic risks to the broader economy, with potential ramifications for millions of workers worldwide. Corporate bankruptcies have already reached multi-year highs in countries such as the United States, Canada, the U.K., France, and Spain, underscoring the strain on businesses struggling to stay afloat amidst mounting financial pressure.
While some experts speculate that central bank interventions, such as interest rate cuts, could provide temporary relief for zombies, others caution that the pandemic-induced surge in their ranks may not be entirely transitory. Nevertheless, the growing prevalence of these financially distressed firms underscores the fragility of the economic recovery and the formidable challenges policymakers face in navigating a path forward.
Moreover, the proliferation of stock buybacks, funded by borrowed capital, has further exacerbated the financial vulnerabilities of many companies. Illustrative examples such as Bed Bath & Beyond and SmileDirectClub serve as cautionary tales, where heavy borrowing for share repurchases ultimately contributed to their downfall, leaving thousands of workers unemployed and shareholders reeling from substantial losses.
Looking ahead, the potential collapse of numerous zombie companies could unleash a cascade of systemic risks, amplifying vulnerabilities within the financial system and posing a significant threat to broader economic stability. With significant debt maturities looming and interest rates on the rise, the window of opportunity for these firms to stave off bankruptcy is rapidly closing. As investors grapple with the implications of this impending reckoning, the broader economic outlook remains shrouded in uncertainty, with the fate of zombie companies poised to shape the trajectory of recovery in the months and years ahead.