An Associated Press analysis found that the number of publicly listed “zombie” companies – companies so heavily indebted that they can’t even pay interest on their loans – has surged to nearly 7,000 globally, including 2,000 in the United States.
Many of them will soon face a day of reckoning, when they may not be able to repay hundreds of billions of dollars in loans as they come due.
“They’re going to get crushed,” said Robert Spivey, managing director at Valens Securities, of the weakest zombies.
Here are the key takeaways from the AP analysis:
What is a zombie company?
Zombies are typically defined as companies that have failed to earn enough money from operations over the past three years to even pay interest on loans. Their numbers have swelled as years of low interest rates have allowed companies to accumulate large amounts of cheap debt, but have been hit by stubborn inflation that has pushed borrowing costs to a decade high.
The Associated Press analysis found that Australia, Canada, Japan, South Korea, the United Kingdom and the United States have jumped a third or more in raw data rankings over the past decade, including those operating Carnival Cruise Lines, JetBlue Airways, Wayfair, Peloton’s company, Telecom Italia and British soccer giant Manchester United.
Many zombie banks lack large cash reserves, and the interest they pay on many loans is variable rather than fixed, so higher interest rates are hurting them now.
Why are zombie companies an economic problem?
As the zombie population grows, so does the potential damage if they are forced to file for bankruptcy or close their doors permanently. The companies included in the AP analysis employ at least 130 million people in more than a dozen countries.
The number of U.S. bankruptcies has hit a 14-year high, a surge expected during a recession rather than an expansion. Business bankruptcies in Canada, the United Kingdom, France and Spain have also recently hit their highest levels in nearly a decade or more.
In the first few months of the year, hundreds of zombies refinanced their loans as lenders opened their wallets in anticipation of the Federal Reserve’s spending cuts starting in March. The new money helped more than 1,000 zombie stocks in the AP analysis rise 20% or more in the past six months.
But many people don’t or can’t refinance, and time is running out.
Between this summer and September, when many investors expect the Federal Reserve to cut interest rates for the first and only time this year, zombie companies will have to repay $1.1 trillion in loans, including one-third of them, according to an Associated Press analysis. Two’s loan will mature at the end of this year.
Some experts say that if central banks cut interest rates soon, “zombie companies” may be able to avoid layoffs, business unit selloffs or closures, but scattered defaults and bankruptcies could still weigh on the economy.
Wall Street, for its part, is not panicking. Investors have been buying shares in zombie companies and their “junk bonds,” the loans that rating agencies consider to be at greatest risk of defaulting. While this may help zombie companies raise cash in the short term, investors who put money into these securities and drive up their prices could ultimately face significant losses.
“If interest rates stay at this level in the near future, we’re going to see more bankruptcies,” said George Cipoloni, a fund manager at Penn Mutual Asset Management. “At some point, the money is due and they can’t get it. Game over.
How stock buybacks hurt zombie companies
For years, credit ratings agencies and economists have been warning about the dangers of companies taking on more debt as interest rates have fallen, but when the world’s central banks slashed benchmark rates to near zero in the 2009 financial crisis, That danger received a huge boost when China cut benchmark interest rates again to near zero.
It was a giant, unprecedented experiment designed to spark a lending boom that would help avert a worldwide depression. It has also created what some economists call a credit bubble that extends well beyond zombie companies, while low interest rates have lured governments, consumers and larger, healthier companies into borrowing heavily.
What makes many zombie companies unique is that their debt is used not to expand, hire, or invest in technology, but instead to repurchase their own stock, for example.
These so-called buybacks allow companies to “retire” shares, or remove them from the market, as a way to offset the issuance of new shares for top executives to boost their salaries. But too many stock buybacks could drain a company of cash.
Such is the case with Bed Bath & Beyond’s Zombie Fail . The retail chain, which once operated 1,500 stores, had struggled for years, but its massive borrowings and decision to spend $7 billion on buybacks over a decade played a key role in its downfall. Even as the company’s stock price fell from $80 to zero, just three top executives were paid more than $140 million, according to executive data firm Equilar. Tens of thousands of workers in all 50 states lost their jobs last year as the chain filed for bankruptcy.
