Zombie firms are filing for bankruptcy as the Fed commits to higher rates (2024)

In the U.S., 516 publicly listed firms have filed for bankruptcy from January through September 2023. Many of these firms have survived for several years with surging debt and lagging sales.

"The share of zombie firms has been increasing over time," said Bruno Albuquerque, an economist at the International Monetary Fund. "This has detrimental effects on healthy firms who compete in the same sector."

Zombie firms are unprofitable businesses that stay afloat by taking on new debt. Banks lend to these weak firms in hopes that they can turn their trend of sinking sales around.

"A really healthy, well-capitalized banking system and financial sector is one of the most important factors in ensuring that unhealthy firms are wound down in a timely way rather than being propped up," said Kathryn Judge, a professor of law at Columbia University.

Economists say that zombie firms may become more prevalent when banks or governments bail out unviable firms. But the Federal Reserve says the share of firms that are zombies fell after the Covid-19 emergency stimulus measures were implemented. The Fed says banks are refusing to keep weak firms in business with favorable extensions of credit.

The Fed economists point to healthy balance sheets at U.S. firms, despite the increasing weight of interest rate hikes. The effective federal funds rate was 5.33% in October 2023, up from 0.08% in October 2021.

"The biggest implication of the rapid rise in interest rates that we've seen the last five or six quarters, actually, is that it reestablished cash," said Lotfi Karoui, chief credit strategist at Goldman Sachs. "That actually puts some constraints on risk assets."

The Fed says it thinks interest rates will remain higher for longer."Given the fast pace of tightening, there may still be meaningful tightening in the pipeline," Fed Chair Jerome Powell said at an Economic Club of New York speech Oct. 19.

Watch the video above to learn more about the Fed's battle with unviable zombie firms in the U.S.

Zombie firms are filing for bankruptcy as the Fed commits to higher rates (2024)

FAQs

Zombie firms are filing for bankruptcy as the Fed commits to higher rates? ›

Zombie firms are filing for bankruptcy as the Fed commits to higher rates. Roughly 10% of companies in the U.S. are considered 'zombie firms' according to a Federal Reserve estimate published in 2021. The Federal Reserve's swift interest rate hikes are making long-suspected zombie firms go bankrupt.

Are zombie companies bad for the economy? ›

Some firms sustain their businesses by taking on more debt that they can repay. Economists call them zombie companies. When compared to their peers, zombies are smaller in size and deliver lower returns to investors. These companies distort markets, keeping resources from their fundamentally sound competitors.

Which companies are zombie companies? ›

Ranking Tables
TickerNameMarket Cap (Adjusted)
BEBloom Energy Corporation2.664 B
RUNSunrun Inc.2.551 B
GSATGlobalstar, Inc.2.411 B
DBDDiebold Nixdorf, Incorporated1.527 B
21 more rows

What is the theory of zombie firms? ›

Kane (1987) explains that zombie firms are enterprises that should have gone out of the market because they lost economic viability but were sustained because of noneconomic factors such as government subsidies and assistance from financial institutions.

How do zombie companies survive? ›

Dubbed zombie companies by Wall Street, they had staggered along year after year even though their finances were fatally flawed. Their survival was only made possible by the uber-low interest rates that marked most of this century, and so when rates began to soar last year, their fate was sealed.

What is the problem with zombie companies? ›

Lack of investment/R&D expenditure: Companies that are considered zombies often have limited investments in new projects or technologies. This lack of investment can hinder their growth potential and make them less competitive in the market, especially if they're in a fast-moving industry like tech.

How many zombie companies are in the US? ›

Roughly 10% of companies in the U.S. are considered 'zombie firms' according to a Federal Reserve estimate published in 2021. The Federal Reserve's swift interest rate hikes are making long-suspected zombie firms go bankrupt.

Can I ignore zombie debt? ›

You may not be able to ignore zombie debt if the debt is actually yours and you still owe an unpaid balance. If you are still legally obligated to pay the debt, see if the debtor is willing to offer a payoff amount that's lower than what's owed or payment plan.

What is the US share of zombie firms? ›

As shown in Figure 1, between 2015 and 2019, our filters select roughly 10 percent of public firms and five percent of private firms as zombies.

How many employees do zombie companies have? ›

Compared to fiscal 2021, the percentage of zombie companies had risen in all industries. Businesses with lower numbers of workers had a higher tendency to be a zombie company. Those with 5 or fewer employees had the highest percentage with 25.1%, and close behind were those with 6–20 employees at 18.7%.

How to identify zombie companies? ›

According to the Federal Reserve's definition for zombie companies, each has:
  1. More leverage—or debt—than the average company in its sector.
  2. Declining sales and/or earnings over its most recent three years.
  3. An interest coverage ratio (ICR) below one.
Jul 12, 2023

Who created the zombie argument? ›

History. Philosophical zombies are associated with David Chalmers, but it was philosopher Robert Kirk who first used the term "zombie" in this context, in 1974. Before that, Keith Campbell made a similar argument in his 1970 book Body and Mind, using the term "imitation man".

Is Boeing a zombie company? ›

Examples of zombie companies are Boeing (BA), Bloom Energy Corporation (BE), Sunrun Inc.

What companies have the highest debt? ›

Fannie Mae is the world's largest debtor, carrying $4.232 trillion in debt. U.S. companies make up 60.13% of the $10.8 trillion owed by the top 100 global companies in debt. Toyota holds the title of the world's most indebted company outside the financial industries, with a debt of $221.13 billion.

What are zombie companies in rising interest rates? ›

For Zombie firms, that killer blow is higher interest rates. Zombie firms are essentially companies that exist on borrowed time. They struggle to generate enough profits to cover their debt obligations, yet manage to stay afloat thanks to lenient borrowing conditions.

What are US zombie companies? ›

Zombie companies are typically subject to higher borrowing costs and may be one just event—market disruption or a poor quarter performance—away from insolvency or a bailout. Zombies are especially dependent on banks for financing, which is fundamentally their life support.

Are zombie firms bad? ›

Zombie companies also pose a threat to healthy, well-run and otherwise viable businesses in both their industry and region. If the zombie company is large enough, or there are too many zombie companies, then they can actually harm the economy of a country.

What is the zombie economy in the US? ›

The stock market has been jittery lately. Blame zombies. Or rather, zombie companies, which are debt-saddled firms with unsustainable business models. One strategist says they've created a "zombie economy" that's contributed to volatility as interest rates have risen.

What is the purpose of zombie economics? ›

Zombie Economics takes the reader through the origins, consequences, and implosion of a system of ideas whose time has come and gone.

Is zombie debt illegal? ›

Re-age debts on credit reports.

For most items, this limit is seven years. But some zombie debt collectors report an old debt as new so that it pops up on a credit report again. This tactic is illegal.

References

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