Takeaways from AP analysis on the rise of world’s debt-laden ‘zombie’ companies

NEW YORK — An Associated Press analysis shows that the number of publicly traded “zombie companies” — which are so burdened with debt that they struggle to even pay interest on their loans — has risen to nearly 7,000 worldwide, including 2,000 in the United States.

And many of them could soon face the day of reckoning, with due dates on hundreds of billions of dollars in loans they may not be able to repay.

“They will be crushed,” Robert Spivey, managing director of Valens Securities, said of the weakest zombies.

These are the most important conclusions from the AP analysis:

Zombies are typically 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 grown because low interest rates have allowed companies to pile up lots of cheap debt for years, only to be chased by persistent inflation that has pushed up borrowing costs. decade highlights.

AP’s analysis shows that their raw rankings have risen by a third or more over the past decade in Australia, Canada, Japan, South Korea, the UK and the US, including companies that operate Carnival Cruise Line, JetBlue AirwaysWayfair, Peloton, Italy Telecom Italy and British football giants Manchester United.

Many zombies do not have large cash reserves, and the interest they pay on many of their loans is variable and not fixed, so higher interest rates are harmful to them at this time.

As the number of zombies has increased, so has the potential damage if they are forced to file for bankruptcy or close their doors permanently. The companies in AP’s analysis employ at least 130 million people in a dozen countries.

The number of U.S. companies going bankrupt has already reached a 14-year high, a rise expected in a recession, not an expansion. Business failures have also recently reached highs of nearly a decade or more in Canada, Britain, France and Spain.

During the first few months of this year, hundreds of zombies refinanced their loans as lenders opened their wallets in anticipation of the Federal Reserve starting cuts in March. That new money helped the shares of more than 1,000 zombies in AP’s analysis rise 20% or more over the past six months.

But many were unwilling or unable to refinance, and time is running out.

Throughout the summer and into September, when many investors now expect the first and only Fed discount this year, according to AP’s analysis, the zombies will have to pay off $1.1 trillion in loans, two-thirds of the total due by the end of the year.

Some experts say zombies could prevent layoffs, sell-offs or collapses if central banks cut rates quickly, though scattered defaults and bankruptcies could still hurt the economy.

Wall Street, for its part, is not panicking. Investors have bought shares of a number of zombies and their ‘junk bonds’, credit rating agencies consider the greatest risk of default. While this may help the zombies raise money in the short term, investors who pour money into these securities and drive up their prices could ultimately face heavy losses.

“If interest rates remain at these levels for the foreseeable future, there will be more bankruptcies,” said George Cipolloni, fund manager at Penn Mutual Asset Management. “At some point the money will run out and they won’t have it anymore. It’s game over.”

The dangers of companies accumulating debt has been warned about by credit rating agencies and economists for years as interest rates fell, but got a big boost when central banks around the world cut benchmark interest rates to near zero during the 2009 financial crisis and then again during the 2020-2021 pandemic.

It was a gigantic, unprecedented experiment, designed to spark a borrowing boom that would help prevent a global depression. It also created what some economists called a credit bubble that spread far beyond the zombies, with low interest rates also leading to large borrowing from governments, consumers and larger, healthier companies.

What distinguished many zombies was that their debt was not used to expand, hire or invest in technology, but to buy back their own shares, for example.

These so-called buybacks allow companies to “retire” or take shares off the market, a way to make up for new shares created for top executives to boost their pay packages. But too many stock buybacks can drain money from a company.

Such was the case with the Bed Bath zombie failure & Past. The retail chain that once operated 1,500 stores struggled for years, but heavy borrowing and the decision to spend $7 billion on buybacks within a decade played a key role in its demise. According to data firm Equilar, salaries for just three top executives reached $140 million, even as shares fell from $80 to zero. Tens of thousands of workers in all 50 states lost their jobs as the chain continued to expand bankruptcy declaration last year.