Wise Owl Trading

 

How is this an economic positive or market-friendly development?

America's Zombie firms have racked up over $2.2 trillion of new debt and their numbers are swelling.

From Boeing., Carnival. and Delta. to Exxon, and Macy's to name a few., many of the nation’s most iconic firms are NO longer earning enough to cover their interest expenses (a key criterion, for zombie status). More than 217 other corporations have joined the ranks of so-called zombie firms since the onset of the Covid-19 pandemic, according to a recent Bloomberg article on financial data that I read over 3,000 of the country’s largest publicly traded firms. In fact, zombies now account for nearly a 26% of those firms. Even starker, they have added more than $1 trillion of debt to their balance sheets in the span, bringing total obligations to a tad over 2.2 trillion which is more than the roughly $1.58 trillion zombie firms owed at the peak of the TBTF-banker led great financial crisis.

Maybe just maybe the Federal Reserve’s effort to stave off a rash of bankruptcies by purchasing corporate bonds might very well have prevented another depression. But in providing such air to many hundreds of ailing firms gain virtually unfettered access to credit markets, policy makers may inadvertently be directing the flow of capital to a vast number of then and now unproductive firms, depressing real employment and growth for many years to come (likely unintended consequences of FED actions) The FED, for “BS” so called stability reasons, decided to step in and resurrect and save these zombies and they knew full well (despite their words to the contrary) that they were going to create zombies. Now the question becomes, what about the firms that have been kept alive that otherwise would have gone out of business...do we provide more bailout monies to them via loans etc. as their numbers in the U.S. have been increasing distinctly for over 13 years (since the housing market implosion), fueled mostly by many years of ultra-loose monetary policy.

Zombie firms get their so-called name because of their inherent tendencies to crawl along, unable to earn enough real revenue to dig out from under their massive debt obligations, but with access to credit to roll over their debts. They are a drag on the economy because they keep valuable real assets tied up in firms that can’t afford to invest and build their businesses.

 Of course, not every company that becomes a zombie is destined to stay one forever. BUT the vast amount of borrowing undertaken by struggling firms in recent months will almost certainly limit the capacity of many to make capital expenditures and adapt to shifting consumer habits.

 Bloomberg’s analysis looked at the trailing 12-month operating income of firms in the Russell 3000 index relative to their interest expenses over the same period. The results paint a grim picture. Almost a 25% of the index, or 739 firms, have not earned enough to meet their interest payments.

Boeing has seen its total obligations balloon by more than $32 billion this year, while Carnival’s debt burden has increased $14.8 billion, Delta has added $24.2 billion, Exxon $16.2 billion, and Macy’s $1.2 billion, according to data collected by Bloomberg.

 I have warned that zombies are less productive, spend less on physical and intangible capital and grow less in terms of employment and assets than their competitive peers. But new research from the Bank for International Settlements shows that zombies may be even more damaging to an economy than previously thought. Not only are firms staying in a zombie state for longer than in years past, but of the roughly 60% of firms that do manage to ultimately exit zombie status, experience prolonged weakness in productivity, profitability, and growth,

 Zombie firms have been building due to lax markets that provided staying power for insolvent firms. The pandemic exacerbated this disease. From an economic theory standpoint, zombies lower long-term growth as you have misallocation of capital and firms commanding market share but without the ability to invest in growth. Nearer term, because zombie firms exhaust value, credit-recovery assumptions should go lower, which arguably should send spreads higher to compensate.