Conclusions from AP analysis of the rise of debt-ridden “zombie” companies around the world

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

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

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

Here are the main findings from the AP Analysis:

Zombies are commonly defined as companies that have failed to make enough money from their operations over the past three years to pay even the interest on their loans. Their numbers rose because low interest rates for years allowed companies to accumulate a lot of cheap debt, only to be buffeted by persistent inflation that pushed borrowing costs higher. decade highs.

The AP analysis found that its raw numbers positions have increased by a third or more over the past decade in Australia, Canada, Japan, South Korea, the United Kingdom and the United States, including companies that run Carnival Cruise Line, JetBlue AirwaysWayfair, Peloton, Italy Telecom Italy and British football giant Manchester United.

Many zombies 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.

As the number of zombies increases, so does the potential harm if they are forced to declare bankruptcy or close their doors permanently. The companies analyzed by the AP employ at least 130 million people in a dozen countries.

The number of North American companies going bankrupt has already reached a 14-year high, an increase expected in a recession rather than an expansion. Business bankruptcies have also recently reached highs of nearly a decade or more in Canada, the United Kingdom, France and Spain.

During the first few months of this year, hundreds of zombies refinanced their loans as lenders opened their wallets in anticipation that the Federal Reserve would begin cutting in March. That new money helped the stocks of more than 1,000 zombies in the AP analysis to rise 20% or more in the last six months.

But many have not or have not been able to refinance and time is running out.

During the summer and September, when many investors are now waiting for the one and only Fed cut This year, zombies will have to pay back $1.1 billion in loans, according to AP analysis, two-thirds of the total due by the end of the year.

Some experts say zombies may be able to prevent layoffs, business unit sales or collapse if central banks cut interest rates soon, although scattered defaults and bankruptcies could still weigh on the economy.

For its part, Wall Street is not panicking. Investors have been buying shares in some zombies and their “junk bonds”, loans that rating agencies consider to have a higher risk of default. While this may help zombies raise money in the short term, investors who invest money in these securities and drive up their prices may eventually face heavy losses.

“If rates remain at this level for the foreseeable future, we will see more bankruptcies,” said George Cipolloni, fund manager at Penn Mutual Asset Management. “At some point the money is due and they won’t receive it. The game is over.”

O dangers of companies accumulating debt he was warned about by credit rating agencies and economists for years as interest rates fell, but received a big boost when central banks around the world cut benchmark rates to near zero in the 2009 financial crisis and again in the pandemic. from 2020-21.

It was a gigantic and unprecedented experiment, designed to trigger a borrowing binge that would help avert a worldwide depression. It also created what some economists called a credit bubble that spread far beyond the zombies, with low rates that also attracted heavy borrowing from governments, consumers and larger, healthier businesses.

What set many zombies apart was that their debt was not used to expand, hire, or invest in technology, but in things like buying back their own shares.

These so-called buybacks allow companies to “retire” shares, or remove them from the market, a way of compensating for new shares created for senior executives to increase their salary packages. But too many share buybacks can drain money from a company.

That was the case with Bed Bath’s zombie flop & In addition. The retail chain that once operated 1,500 stores struggled for years, but its heavy borrowing and decision to spend $7 billion over a decade on buybacks played a key role in its downfall. Pay for just three top executives exceeded $140 million, according to executive data firm Equilar, even as their shares fell from $80 to zero. Tens of thousands of workers in all 50 states lost their jobs as the chain spiraled toward its bankruptcy filing last year.