They are known as zombies, businesses that are so overburdened with debt that they are hardly able to pay even the attention on their loans and are frequently only a poor business hit apart from ending forever.
Their numbers have increased to almost 7, 000 publicly traded companies around the world — 2, 000 in the United States only — as a result of an Associated Press study, which was caused by years of piling up low bill followed by persistent inflation, which has caused borrowing costs to century highs.
And then many of these walking wounded, which are primarily small and medium-sized, may soon face their day of reckoning as owing dates loom on the hundreds of billions of dollars of funding they may not be able to pay back.
” They’re going to find crushed”, Valens Securities Managing Director Robert Spivey said of the weakest monsters.
Added Miami investment Mark Spitznagel, who reportedly bet against companies before the last two crashes:” The time is ticking”.
Zombies are typically defined as businesses that have n’t made enough money from operations in the last three years to even pay the interest on their loans. AP’s study found their divisions in natural numbers have jumped over the past century by a second or more in Australia, Canada, Japan, South Korea, the United Kingdom and the U. S., including businesses that run Carnival Cruise Line, JetBlue Airways, Wayfair, Peloton, Italy’s Telecom Italia and British sports big Manchester United.
To be sure, the number of businesses, in public, has increased over the past century, making comparisons challenging, but also limiting the examination to companies that existed a decade ago, zombies have jumped almost 30 %.
They include utilities, food producers, technology companies, owners of hospitals and nursing home chains whose poor finances hobbled their responses in the epidemic, and real estate firms struggling with fifth- empty office buildings in the heart of big cities.
As the number of zombies grows, so does the potential harm they might suffer if they are forced to file for bankruptcy or shut their doors for good. At least 130 million people work for companies according to the AP analysis in a dozen nations.
Already, the number of U. S.companies going bankrupt has hit a 14- year high, a surge expected in a recession, not an expansion. In Canada, the U.K., France, and Spain, corporate bankruptcies have recently reached highs of nearly a decade or more.
Some experts believe zombies could be able to avoid layoffs, selloffs of business units, or collapse if central banks cut interest rates, which the European Central Bank began doing this week, even though scattered defaults and bankruptcies could still put pressure on the economy. Some people believe that the pandemic increased the number of zombies and that the impact is temporary.
” Revenue went down, or did n’t grow as much as projected, but that does n’t mean they are all about to go bust”, said Martin Fridson, CEO of research firm FridsonVision High Yield Strategy.
For its part, Wall Street is n’t panicking. Investors have been purchasing the stock of some zombies and their” junk bonds,” which credit rating agencies view as the most in danger of default. While that may help zombies quickly raise money, investors who invest in these securities and raise their prices could eventually experience significant losses.
” We have people gambling in the public markets at an unprecedented level”, said David Trainer, head of New Constructs, an investment research group that tracks the cash drain on zombies. ” They do n’t see risk”.
WARNING SIGNS
Credit rating organizations and economists expressed concern about the risks of businesses accumulating debt for years as interest rates fell, but the trend grew when central banks around the world cut benchmark rates to close to zero during the 2009 financial crisis and then again during the pandemic of 2020-21.
It was a massive, unheard experiment meant to stoke a global depression that would result in a borrowing spree. It also created what some economists saw as a credit bubble that spread far beyond zombies, with low rates that also enticed heavy borrowing by governments, consumers and bigger, healthier companies.
The difference between many zombies is that they lack substantial cash reserves and that the interest they pay on many of their loans is variable rather than fixed, so higher rates are currently hurting them. Most dangerously, zombie debt was often not used to expand, hire or invest in technology, but on buying back their own stock.
In a bid to make up for the new shares that are frequently created to boost the pay and retention packages for CEOs and other top executives, these’repurchase’s allow companies to “retire” shares, or take them off the market.
But too many stock buybacks can drain cash from a business, which is what happened at Bed Bath &, Beyond. The former 1,500 store retail chain struggled for years as a harrowing transition to digital sales and other issues, but its heavy borrowing and decision to spend$ 7 billion on buybacks in a decade were key factors in its demise.
These buybacks occurred as a result of significant cash flows for top management, which Bed Bath &, Beyond claimed in regulatory filings were intended to be in line with financial performance. Pay for just three top executives topped$ 140 million, according to executive data firm Equilar, even as its stock sunk from$ 80 to zero. As the chain’s bankruptcy filing last year spiraled, tens of thousands of workers in all 50 states lost their jobs.
Following then-President Donald Trump’s 2017 tax overhaul, which reduced corporate rates and allowed repatriation of profits from overseas, companies had a chance to reduce their debt. However, the majority of the windfall was instead used for buybacks. 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.
Before the tax cut, SmileDirectClub spent a little over$ 1 million on the purchase of its own stock before spending$ 78 million to increase the pay packages of its top executives. In just four years, a former CEO received$ 20 million. 2, 700 people lost their jobs as a result of the stock in the heavily indebted teeth-straightening business ‘ plunged before it stopped operating last year.
” I was like,’ How did this ever happen?'” said George Pettigrew, who held a tech job at the company’s Nashville, Tennessee, headquarters. ” The amount of the debt shocked me.
Another zombie, JetBlue, suffered problems felt by many airlines, including the lingering impact of lost business during the pandemic. However, it was also hurt by the choice to purchase hundreds of millions of dollars of its own stock and double its debt in the previous ten years. That stock has fallen by two-thirds as a result of the rising interest costs and profits, and JetBlue has n’t produced enough pre-tax earnings to pay$ 717 million in interest over four straight years.
Because big purchases of aircraft “are an intrinsic part of the business model” and do n’t reflect an airline’s true health, JetBlue claimed the AP’s method of screening for zombies is inaccurate for airlines. The business added that since recently, it has been reinforcing its finances by cutting costs and putting off purchasing any new aircraft. Additionally, JetBlue has n’t completed a significant stock buyback in four years.
In some circumstances, controlling shareholders and wealthy family owners receive loan money directly.
The Glazer family, who owns a sizable portion of Manchester United soccer in the Premier League, slapped the business with debt in 2005 before obtaining hundreds of millions of pounds in the wake of the loan request. 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.
After a recent downpour that caused water to cascade down from the upper stands in what spectators dubbed” Trafford Falls,” fan lobbying group head Chris Rumfitt said,” They’ve papered over the cracks but we’ve been in decline for more than a decade. ” There have been zero investments in infrastructure”.
The Glazers, who separately own the NFL’s Tampa Bay Buccaneers, recently brought in a new part owner at Manchester United who has promised to inject$ 300 million into the business. The stock is falling anyway, down 20 % so far this year to$ 16.25, no higher than it was a decade ago.
Manchester United declined to comment.
Zombie collapses would n’t be so scary if robust spending by governments, consumers and larger, more stable companies could act as a cushion. However, they also piled up debt.
The U.S. government is projected to spend$ 87 billion on interest on its debt alone this year, which is an increase of a third in a year and more than it does on defense. Consumers are tapped out in South Korea as credit card and other household debt levels record new highs. Homes are missing payments on their mortgages in the United Kingdom at a rate not seen in a long time.
A real concern for investors is that too many zombies could collapse at once because central banks maintained them on life support with low interest rates for years rather than allowing failures to develop over time, similar to how allowing small forest fires to burn dry brush prevents an inferno.
” They’ve created a tinderbox”, said Spitznagel, founder of Universa Investments. ” Any wildfire now threatens the entire ecosystem”.
TIME RUNNING OUT?
As lenders opened their wallets in anticipation of the Federal Reserve’s March budget cuts, hundreds of zombies refinanced their loans for the first few months of this year. In AP’s analysis, those stocks of more than 1, 000 zombies increased 20 % or more over the past six months across the dozen nations thanks to that new money.
But many did not or could not refinance, and time is running out.
Through the summer and into September, when many investors now expect the first and only Fed cut this year, zombies will have to pay off$ 1.1 trillion of loans, according to AP’s analysis, two- thirds of the total due by the end of the year.
For its calculations, the AP used pre- tax, pre- interest earnings of publicly- traded companies from the database FactSet for both years it studied, 2023 and 2013. The countries selected were the biggest by gross domestic product: the U. S., China, Japan, India, Germany, the U. K., France, Canada, South Korea, Spain, Italy and Australia.
The study did not consider bank assets or cash that a company could use to pay its bills. If other years were used, the results would also vary depending on the 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.
Most of the publicly traded companies in the countries studied — 80 % of 34, 000 total — are not zombies. More money is typically in these larger, healthier companies, and many of these companies have reinvested the money in higher-yielding bonds and other assets to make up for the higher interest rates they are currently paying. Many refinanced after the pandemic, pushing back repayment due dates into the future.
If rates do n’t drop over the next few years, the debt will still be there, which could cause these businesses to struggle as well. In 2026,$ 586 billion in debt is coming due for the companies in the S&, P 1500.
” They are n’t on anyone’s radar yet, but they are a hurricane. They could be a Category 4 or Category 5 if interest rates do n’t go down”, Valens Securities ‘ Spivey said. ” They’re going to lay people off. They’re going to have to cut costs”.
Some zombies are n’t waiting.
Telecom Italia made a deal last year to sell its landline network, but debt worries continue to slash the company’s stock, so it has since decided to also sell its subsea telecom unit and cell tower business.
After going bankrupt five years ago and having less debt, radio tycoon iHeartMedia is still struggling to make ends meet by unloading real estate and radio towers. Its stock has fallen from$ 16.50 to$ 1.10 in five years.
Even though the exercise company Peloton Interactive’s pretax earnings were n’t sufficient to cover interest payments, the company has since cut off hundreds of employees to pay debt that has more than quadrupled to$ 2.3 billion in just five years. During the pandemic, stock that had soared to more than$ 170 per share recently closed at$ 3.74.
” 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. They will eventually have the money when it comes due, they say. It’s game over”.
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AP Soccer Writer James Robson contributed from Manchester, England.
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Contact AP’s global investigative team at]email , protected ] or https ://www.ap.org/tips/
