NEW YORK — They are called zombies, companies so laden with debt that they are just stumbling by on the brink of survival, barely able to pay even the interest on their loans and often just a bad business hit away from dying off for good.
To be sure, the number of companies, in general, has increased over the past decade, making comparisons difficult, but even limiting the analysis to companies that existed a decade ago, zombies have jumped nearly 30%. "Revenue went down, or didn't grow as much as projected, but that doesn’t mean they are all about to go bust," said Martin Fridson, CEO of research firm FridsonVision High Yield Strategy.
The difference for many zombies is they lack deep cash reserves, and the interest they pay on many of their loans is variable, not fixed, so higher rates are hurting them right now. Most dangerously, zombie debt was often not used to expand, hire or invest in technology, but on buying back their own stock.
Companies had a chance to cut their debt after then-President Donald Trump’s 2017 tax overhaul slashed corporate rates and allowed repatriation of profits overseas. Butinstead. Over the next two years, U.S. companies spent a record $1.3 trillion repurchasing and retiring their own stock, a 50% jump from the prior two years.
In some cases, borrowed cash has gone straight into the pockets of controlling shareholders and wealthy family owners.soccer franchise loaded up the company with debt in 2005, then got the team to borrow hundreds of millions a few years later. At the same time, the family had the team pay dividends to shareholders, including $165 million to the Glazers themselves, while its stadium, the Old Trafford, fell into disrepair.
The study did not take into account cash in the bank that a company could use to pay its bills or assets it could sell to raise money. The results would also vary if other years were used due to economic conditions and interest rate policies. Still, studies by both the International Monetary Fund and the Bank for International Settlements, an organization for central banks in Switzerland, generally support AP’s findings that zombies have risen sharply.
“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."Stocks are about to hit a 'wall of money' that will drive the market to record highs in July, Goldman Sachs says