Debt-laden companies across Europe, Middle East and Africa face a $500 billion refinancing scramble in the first half of 2024, a challenge that could kill off many āzombieā businesses even though an expected peak in rates could bring some relief [3f558fb2].
Zombie firms, which are companies that are unable to cover their debt costs with their operating profits, have become a growing concern in recent years. These firms are kept alive by low interest rates and lenient lending practices, but they are a drag on the economy and hinder productivity. As interest rates rise, banks tend to offer more favorable credit conditions to zombie firms in order to prevent them from defaulting. This can have negative consequences for more productive firms and overall economic growth [64de6db6].
A recent study conducted by CEPR analyzed balance sheet data from nonfinancial listed firms in 49 countries between 2000 and 2019. The study found that zombie firms are less responsive to monetary policy shocks, as banks engage in evergreening practices by offering better credit conditions to these firms. The research also revealed that highly capitalized banks are more likely to write off zombie loans and absorb the losses [64de6db6].
The upcoming refinancing scramble in 2024 could be a turning point for many zombie firms. As debt costs increase and interest rates rise, these companies may struggle to secure the necessary funding to continue operating. This could lead to a surge in corporate failures and a necessary cleansing of the economy. While an expected peak in rates could provide some relief, it may not be enough to save all zombie businesses [3f558fb2].
The implications of corporate failures extend beyond the individual firms. They can have ripple effects on the broader economy, impacting investment, employment, and overall productivity. Policymakers need to consider the potential consequences of zombie firms and take steps to strengthen banks' balance sheets, limit risky lending practices, and have efficient resolution mechanisms in place for weak firms. This will be crucial in mitigating the risks associated with corporate failures and ensuring a healthy and sustainable economy [64de6db6] [3f558fb2].
Experts warn that a wave of bankruptcies and corporate debt defaults could increase the likelihood of a recession as high interest rates impact businesses and consumers. As of August, 459 companies have filed for bankruptcy, surpassing the total number of filings in 2021 and 2022. Globally, there were 107 corporate debt defaults in August, the highest monthly total since 2009. Borrowing costs for some firms have doubled or tripled compared to previous years, putting strain on corporate balance sheets. Effective yields for below-investment grade corporate debt have risen to 9% this month. The yield on the 10-year US Treasury has also increased to above 4.8%, the highest level in 16 years. Zombie firms, which lack the cash to service their debt, are particularly vulnerable in this environment. Charles Schwab estimates that US bankruptcies and debt defaults will continue to rise into 2024, potentially pushing the economy into a recession. The wave of distress in the corporate sector could lead to job cuts, impact asset prices, and slow down the economy. Other factors such as depleted savings, the restart of student loan payments, and rising bond yields also indicate a potential economic slowdown. [8a9a8fb0] [3f558fb2]
There has been an increase in 'mega bankruptcies' by companies with more than $1 billion in assets. In the first half of this year, there were 16 such bankruptcies, compared to an average of 11 between 2005 and 2022. However, economists believe that this does not indicate a doom-death loop for the economy. Bankruptcy filings in the US rose by 10% in the year ending in June, compared to the previous year. This is significant as filings have rarely increased since 2010, with bankruptcies falling sharply after the start of the pandemic in 2020. [2d2610cd]
Eight U.S. senators, including Sherrod Brown, Bernie Sanders, and Roger Marshall, have formally requested the Department of the Treasury to consider a potential 'going concern' bid to save union trucking jobs as Yellow Corp.'s bankruptcy proceedings continue. The senators are urging the Treasury to work with the U.S. Justice Department to extend the maturity date of loans obtained by Yellow under the CARES Act, which would secure financing for the bid and help retain thousands of trucking jobs. Yellow Corp. filed for Chapter 11 bankruptcy protection in August, resulting in job losses for 22,000 Teamsters. The senators are advocating for significant corporate bankruptcy reform to ensure workers are prioritized for financial restitution. [e76bdc46]
The concept of 'zombie companies'ācompanies without functional business models that survive on cheap capitalāhas become a growing concern. With the Federal Reserve ending the era of cheap capital and interest rates rising, there are concerns about the survival of these companies. The example of WeWork, a real estate company that recently went bankrupt, is highlighted as a prominent example of a company that couldn't survive in a high-interest rate environment. The article explores the risks faced by companies with risky profiles and floating-rate debt, as well as the challenges of refinancing in a more expensive market. It also discusses the broader issue of corporate stress, including rising bankruptcies and defaults. The potential systemic risks associated with private equity and the biotech sector are also mentioned. While some believe the stress is a normal part of market dynamics, others worry about the possibility of a larger financial crisis. The article concludes by noting that the end of cheap money means that some companies will make it while others won't. [d80422e4]
Spotify's recent layoffs highlight the potential debt-market crisis that could affect many companies. The company's CEO, Daniel Ek, mentioned that they had taken advantage of low borrowing costs in 2020 and 2021 to invest in expansion, content enhancement, and marketing. However, the current environment has changed, and Spotify needs to reduce costs to raise $1.3 billion in cash to pay off its creditors. If they can't find the money, refinancing will be more expensive. This situation reflects a broader trend, as more companies are struggling with debt repayment. In 2021, the number of company failures is second only to 2020, when the pandemic caused a global recession. The Federal Reserve's interest-rate hikes are expected to increase concerns about debt among corporate America. [563f31fb]
In the first nine months of 2023, 516 publicly listed firms in the United States have sought bankruptcy protection, with a significant number of them being 'zombie firms'. Zombie firms are unprofitable companies that rely on continuous borrowing to sustain operations. The prevalence of zombie firms is on the rise, negatively impacting the competitive landscape. The Federal Reserve has observed a decrease in the proportion of zombie firms following the implementation of Covid-19 emergency stimulus measures. Despite a significant hike in interest rates, the balance sheets of US firms remain healthy. The Federal Reserve plans to keep interest rates elevated to prevent unviable zombie firms from operating artificially through financial support. Bank of America's CEO warns of the full effect of rate hikes on middle-market companies and the mortgage market. US businesses remain optimistic about falling interest rates, with the Fed planning up to three interest rate cuts this year. [34a49483]
Between January and September 2023, 516 publicly listed companies in the US declared bankruptcy, raising concerns about the growing number of 'zombie firms'. These unprofitable companies survive by accumulating debt and experiencing stagnant sales. Zombie firms negatively impact the competitive landscape and rely on new debt to stay operational. The Federal Reserve has observed a decrease in the number of zombie companies following the Covid-19 emergency stimulus measures. The state of US corporate balance sheets remains strong despite rising interest rates. The Federal Reserve plans to maintain higher interest rates for an extended period. The report discusses the challenges faced by zombie firms in the current economic climate and the role of the Federal Reserve in managing the situation. [86646cf0]
An Associated Press analysis found that the number of publicly-traded 'zombie' companies, which are struggling to pay even the interest on their loans, has risen to nearly 7,000 worldwide, including 2,000 in the United States. Many of these companies may face difficulties in paying back their loans. The potential damage is significant, as these companies employ at least 130 million people in a dozen countries. The number of U.S. companies going bankrupt has reached a 14-year high, and corporate bankruptcies have also increased in Canada, the U.K., France, and Spain. Zombies may be able to avoid layoffs or collapse if central banks cut interest rates, but defaults and bankruptcies could still impact the economy. The Federal Reserve is expected to cut rates, but if rates stay at current levels, more bankruptcies are likely. The dangers of companies accumulating debt have been warned about for years, and the low interest rates have encouraged heavy borrowing. Many zombie companies used their debt for stock buybacks rather than expansion or investment, which drained cash from their businesses. The failure of Bed Bath & Beyond, which spent $7 billion on buybacks, is an example of how stock buybacks can contribute to a company's downfall. [6c4acaa8]
The rise of 'zombie' companies, financially distressed businesses drowning in debt, is a clear signal of big trouble ahead. There are nearly 7,000 zombie companies worldwide, with 2,000 in the United States alone. The number of financially distressed firms has increased by over 30% in several major economies. Retail stores are closing at a staggering rate, with the total number of store closings in 2024 projected to be nearly 40% higher than in 2023. The potential collapse of these zombie companies could lead to massive layoffs and economic disruption. Wall Street investors are recklessly investing in zombie companies, ignoring the financial instability they pose. The roots of this zombie epidemic can be traced back to central banks' actions during the 2009 financial crisis and the 2020-21 pandemic. Rising interest rates pose a significant problem for zombie companies, as their interest payments increase. The collapse of zombie companies could trigger a domino effect, leading to broader economic instability. The shoplifting crisis is forcing major retailers to shut down locations, costing them over $100 billion a year. It is crucial to be prepared for a large-scale financial crisis by ensuring a sufficient supply of essential items, increasing home security, diversifying assets, learning self-sufficiency skills, and building a community network.