According to an Associated Press investigation, the number of the world’s debt-laden ‘zombie’ companies has risen, and they will have to pay off $1.1 trillion in loans by year-end.
The number of publicly traded “zombie” companies—those with debt so high they can’t even afford the interest on their loans—has increased to about 7,000 worldwide, with 2,000 of them in the US, according to an Associated Press investigation.
And many of them may soon have to face their reckoning, as hundreds of billions of dollars in loan payments that they might not be able to make come due.
“They’re going to get crushed,” Valens Securities Managing Director Robert Spivey said of the weaker zombies.
The following are the main conclusions from the AP’s analysis:
Companies that have not generated enough revenue from their operations over the last three years to cover even the interest on their loans are usually referred to as zombies. Their numbers have increased as a result of years of low interest rates that allowed businesses to accumulate large amounts of inexpensive debt before being severely curtailed by persistent inflation that drove borrowing costs to all-time highs.
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.
Higher interest rates are currently harming zombies because many of them lack substantial cash reserves and because the interest they pay on many of their loans is variable rather than fixed.
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 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. Recently, corporate bankruptcies in Canada, the United Kingdom, France, and Spain have reached record highs spanning over a decade or more.
Hundreds of zombies refinanced their loans over the first three months of this year as lenders opened their wallets expecting the Federal Reserve to begin tapering in March. In the last half of a year, the stocks of over 1,000 zombies analyzed by AP have increased by 20% or more thanks to this fresh funding.
However, a lot of people refinanced but there’s not much time left.
Zombies will have to repay $1.1 trillion in loans through the summer and into September, when many investors now anticipate the first and only Fed cut this year, or two-thirds of the entire amount due by the end of the year, according to AP’s estimate.
If central banks decrease interest rates immediately, some experts believe zombies could be spared layoffs, business unit sales, or collapse; but, sporadic defaults and bankruptcies could still hurt the economy.
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 as a result, but investors who buy these instruments and drive up their prices risk suffering significant losses in the long run.
“If rates stay at this level in the near future, we’re going to see more bankruptcies,” said George Cipolloni, a fund manager at Penn Mutual Asset Management. “At some point, the money comes due and they’re not going to have it. It’s game over.”
Credit rating agencies and economists have been warning for years about the risks associated with corporations taking on excessive debt when interest rates drop. 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 intended to ignite a borrowing frenzy that might prevent a global depression. Additionally, because of the low interest rates, it encouraged massive borrowing by consumers, governments, and larger, stronger businesses, creating what some analysts referred to as a “credit bubble” that extended far beyond zombies.
What made many zombies unique was that they utilized their debt for things like buying back their shares instead of using it for hiring, expanding, or investing in technology.
Through these so-called repurchases, firms can compensate for new shares generated for top executives to increase their compensation packages by “retiring,” or taking the shares off the market. Yet, an excessive number of stock buybacks might deplete a company’s liquidity.
That was the situation with Bed Bath & Beyond’s zombie failure. The retail firm, which formerly had 1,500 locations, struggled for years until it decided to spend $7 billion on buybacks over the course of ten years due to severe borrowing. According to executive data firm Equilar, just three top executives’ salaries exceeded $140 million, despite the company’s shares plummeting from $80 to nothing. As the business descended into filing for bankruptcy last year, tens of thousands of employees throughout all 50 states lost their jobs.
Recently, GreatGameIndia reported that HSBC, in a recent assessment, revealed it believes the $22 billion Byju’s is now worth zero, citing financial mismanagement, missed sales targets, governance issues, and the exit of key auditors and board members.
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