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.

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.

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.

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.

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.

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.

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.

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.

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? ›

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".

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

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.

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.

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.

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.

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.

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

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.