You know the setup — the one that’s part of seemingly every horror movie ever made. Would-be victims use their wits to outrun hordes of moaning zombies, but a few folks always get caught and disappear in a grisly, lip-smacking, bone-crunching gore-fest. Will so-called “zombie companies” soon do the same to parts of the U.S. economy?
Zombie companies are those that remain in business but are so deeply in debt that they’ll never catch up. In an age where U.S. monetary policy seems to ease by the day, enterprises of all sizes are tapping time and again into debt markets — potentially creating a corporate landscape littered with zombie firms.
Non-financial corporate debt was already high even before COVID-19, equating to nearly half of U.S. gross domestic product, according to Federal Reserve data. But the borrowing surge is continuing thanks to the pandemic, with more than $1 trillion in new debt issued so far this year. And Monday, the Fed announced plans to create a “broad, diversified market index” and purchase individual corporate bonds on the secondary markets.
All of those billions of dollars for fresh capital will mean that zombie companies can keep funding operations for now. But they’ll keep piling debt on top of debt as they play a waiting game, hoping for a U.S. economic recovery.
Even Federal Reserve Chair Jerome Powell said Tuesday the longer the country’s economic downtown persists the potential for more long-term damage to the economy.
The challenge, of course, is that no one knows when that recovery might transpire. Until then, firms will have to rely on investor and central-bank willingness to keep the debt machinery humming.
But letting companies load up on debt to survive now might have ripple effects later. Yahoo Finance recently quoted Chief Economist Vincent Reinhart of BNY Mellon Asset Management as saying that “allowing zombie companies to linger might be why long-term growth suffers as a consequence of a severe financial crisis and recession.”
The companies embracing debt are often familiar ones, such as struggling travel giants Avis, Marriott and Delta Air Lines. It’s no secret that the pandemic hit car-rental companies, hospitality firms and airlines hard. Still, Deutsche Bank Chief Economist Torsten Slok recently told Bloomberg that the Fed and the U.S. government “are interfering in the process of ‘creative destruction.’ The consequence is that we are at risk the longer this persists. Companies being kept alive that would otherwise have gone out of business … will begin to weigh on the overall potential for growth of the economy and on productivity.”
And yet, Slok also admitted to the newswire that the Fed “had no other choice than to do what it did.”
In other words: Pay now … and pay later, too, it seems.
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