(Noted News) — The coronavirus pandemic has completely rearranged an already precarious economic and capital landscape in 2020, and one of the obvious indicators of the damage done is the increased presence of zombie companies.
Zombie companies are companies whose operating profit is less than the amount required to pay off the interest on their debts, causing them to constantly burn cash and take out more and more debt. Essentially, they create negative wealth in their economies and are the result of ultra-low interest rates and central banks’ willingness to provide liquidity.
These firms make up 15% of the American stock market. According to Finbox, the biggest zombie companies in the USA are Sunrun Inc, Mattel, Scientific Games Corporation, SunPower Corporation, Bloom Energy Corporation, Mr. Cooper Group Inc, and Kennedy-Wilson Holdings Group Inc.
The goal of the continuous lending to already dying companies is supposed to be to keep the stock market and broader economy at large afloat, but many analysts argue that the access to cheap money prevents newer, more efficient companies from entering to market.
As the Fed works its magic on the credit markets, that list could easily get rearranged as companies hit hard by the coronavirus shutdown like Marriot International Inc, Delta Airlines Inc, and Gap Inc create billions of dollars’ worth of bonds with no real plan to be able to pay them.
According to Bloomberg, the amount of amassed corporate debt could reach as much as $1 trillion by the end of the year, a problem compounded by the lack of hope in a V-shaped recovery due to the ongoing coronavirus crisis.
The US is not the first place to acknowledge the problem of zombie companies dragging the economy down. During the non-performing-loan (NPLs) crisis in Europe the OECD reported that the rise in zombie companies was most likely connected to banks placing foolish bets on failing companies.
“Zombie firms are more likely to be connected to weak banks, suggesting that zombie congestion partly stems from bank forbearance—i.e. the tendency for weak banks to bet on the resurrection of failing firms… Distortions in the banking sector also highlight the importance of market-based financing instruments for productivity growth, with the inherent debt bias in corporate tax systems and the lack of venture capital financing emerging as key barriers to technological diffusion.”
They also called for ways to speed up the process of failing companies either recovering or disappearing.
“For example, insolvency reforms that reduce barriers to corporate restructuring and the personal cost associated with entrepreneurial failure could translate into a decline in the zombie capital share of at least 9 percentage points in Spain, Italy or Portugal – countries where the zombie capital share stood at 28%, 19% and 16% in 2013, respectively.”
Japan faces the same issue; as many analysts predict the “Japanification” of the US, zombie companies continue to persist in the land of the rising sun. In their white paper “Zombie Firms And Economic Stagnation In Japan,” Alan Ahearne and Naoki Shinada also link zombie companies to the unwillingness of banks to call in the debts of dying companies.
“Productivity growth is low in industries reputed to have heavy concentrations of zombie firms (such as construction and retail). The reallocation of market share is going in the wrong direction in these industries, adding to already weak productivity performance. In addition, there is evidence that financial support from Japanese banks may have played a role in sustaining this perverse reallocation of market share.”
It’s unclear how the US’ financial overseers plan on dealing with the rise of zombie firms, but fed watcher Danielle DiMartino Booth, who spent 9 years working in Federal Reserve Bank of Dallas before starting her own firm Quill Intelligence, believes that the Fed’s monetary policy in this area is irresponsible.
“I’m not a fan of such a policy. It’s irresponsible. They’re doing it under the auspices of helping the middle class. But there’s no such thing as trickle down to Main Street. They’re punishing savers.”
Rather than just letting a poorly run company die, Booth says that the Fed instead “creates a zombie [company] today, robbing growth from tomorrow. Once a recovery returns, the economy expands, there’s not enough room for new entrants, and the deadwood [is] allowed to survive.”