A tight loan market squeezes zombie firms

They drag, stumble and are hooked up to the life support system. They are, as some economists have dubbed them, “zombie companies”. Think American Airlines and Carnival Cruises – massive companies backed by high brand awareness and a friendly lending environment.

But with monetary policy tightening and a line of credit harder than ever to establish, the bill could soon be due for some 600 zombie firms struggling to pay interest on security-era loans. pandemic.

Living Debt Night

About a fifth of the 3,000 largest publicly traded companies in the United States do not earn enough cash to cover interest costs, according to Bloomberg, giving them the status of a disreputable zombie firm. It can be a sustainable state of existence in normal times, when rates are low and companies can simply refinance debt. And the government’s historic efforts to boost private sector liquidity have given zombie companies months, if not years, of debt financing.

But soaring inflation coupled with rising interest rates may be enough to turn a wave of companies from living dead to dead dead:

  • US corporate profits fell the most in about two years in the first quarter of 2022, and about 620 companies have seen profits fall short of interest payments over the past year – well above pre-COVID levels. 2019 pandemic – according to Bloomberg.
  • Securing loans is now a daunting task: Junk-rated companies, as reported by S&P Global Ratings and Moody’s Investors Service, have borrowed just $56 billion in the bond market so far this year, down 75 % year over year; May saw new lending of less than $6 billion, a massive drop from January’s $80 billion, according to Bloomberg.

A cure for zombies? Even if an upsurge in bankruptcies occurs, it may be unwise to expect a government bailout. “Unless we have another major financial crisis, I don’t think the Fed’s ability to bail out is necessarily that high,” said Viral Acharya, a professor at NYU Stern Business School and former head of the Reserve Bank of India. Bloomberg. “Especially when they explicitly say they want to reduce demand. How is that compatible with keeping these businesses alive?”

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