Sounds Familiar
It appears that the increase in interest rate will be creating a plague of, “Zombie firms,” companies that will be slowly circling the drains as they are increasingly unable to service their debts:
They are creations of easy credit, beneficiaries of central bank largesse. And now that the era of unconventional monetary policy is over, they’re facing a challenge like never before.
They are America’s corporate zombies, companies that aren’t earning enough to cover their interest expenses, let alone turn a profit. From meme-stock favorite AMC Entertainment Holdings Inc. to household names such as American Airlines Group Inc. and Carnival Corp., their ranks have swelled in recent years, comprising roughly a fifth of the country’s 3,000 largest publicly-traded companies and accounting for about $900 billion of debt.
Now, some say, their time may be running short.
Firms that could once count on virtually unfettered access to the bond and loan markets to stay afloat are being turned away as investors girding for a recession close the spigot to all but the most creditworthy issuers. The fortunate few that can still find willing lenders face significantly higher borrowing costs as the Federal Reserve raises interest rates to tame inflation of more than 8%. With surging input costs poised to eat away at earnings, it’s left a broad swath of corporate America with little margin for error.
The end result could be a prolonged stretch of bankruptcies unlike any in recent memory.
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Junk-rated companies, those ranked below BBB- by S&P Global Ratings and Baa3 by Moody’s Investors Service, have borrowed just $56 billion in the bond market this year, a more than 75% decline from a year ago.
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Zombie firms get their nickname because of how they tend to stumble along, weighed down by their debt burdens yet with sufficient access to capital markets to roll over their obligations. They drag on overall productivity and economic growth because they can’t afford to invest in their businesses, and tie up assets that could be better used by stronger players.
The scariest jobs chart ever
A plague that shuts down the economy? We bounce back in about 12 months.
We have a debt overhang created by speculation, lack of regulation, and we have the great recession and jobs to not recover to their prior level for over 6 years. (And that’s ignoring normal growth.
This is why the expansion of finance is so dangerous. They privatize the profits and socialize the losses, and it takes years for society to retire.
When the crash comes, and it’s probably coming sooner rather than later, because there was no accountability the last time around.
The expectation of a bailout, reinforced by the bailouts that they got barely more than a decade ago has made the banksters behavior even more reckless, more divorced from the underlying economy, and more criminal.
