The onset of coronavirus — and the drastic policy response from central banks — has produced an army of companies limping along in the twilight between the living and the dead.
A decade of low interest rates had already sustained a rising number of companies that were able to borrow cheaply and amble on with operating profits that fell short of the interest needed to pay their lenders. Now, the bond binge that followed the depths of the Covid-19 crisis in March has accelerated that trend, giving rise to a new generation of these so-called corporate zombies.
At the end of last year, 13 per cent of companies in the Leuthold 3000 Universe index — akin to the Russell 3000 index of US companies — had staggered along for at least three years with a repayments shortfall, up from 8 per cent at the end of 2008.
But huge market interventions from the Federal Reserve in response to the pandemic dragged down corporate borrowing costs from decade highs in March to historic lows, and facilitated unprecedented debt issuance from companies desperate for cash to outlast the virus’s economic impact.
Fund manager The Leuthold Group calculates that 15 per cent of companies in its index could now be classed as zombies.
“It’s a real worry for us,” said Jun Zhu, a portfolio manager at The Leuthold Group. “More companies are loading up on debt and the number of zombie companies is going up. What happens if all of a sudden capital markets dry up and they cannot refinance or pay down their debt? How will they roll it over or even afford the interest expense?”
Zombies have been more numerous once before: just after the dotcom bubble burst in September 2000.
Ms Zhu said the growth in the number of companies in this predicament comes at a cost to the broader economy, holding back productivity and growth. “We are now at a very concerning level,” she said. “I think zombie companies are in a really dangerous position if the economy turns down.”
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