The events of the collapse of the bank "Silicon Valley Bank" and"Signature Bank", last month, cast a shadow over the global banking sector as it reinforced fears that the new system characterized by higher interest rates has weakened corporate borrowers, from here the term zombie companies pop up.

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 Edited by |Juls McMahon

Economic section - CJ journalist

World – April,10,2023

 

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   Those companies that are having difficulties paying off their debts or banks that are already insolvent but are avoiding collapse are known as" zombie companies", and just as zombies or the Living Dead evoke horror in fairy tales and Motion Pictures, zombie companies also portend economic disasters.

The "MarketWatch" website said that the number of zombie companies has increased over the past few years in light of the tightening of monetary policy, which promotes an increase in their numbers in the coming period.

The term zombie company refers to companies that are unable to earn enough to pay interest costs for a long time, and this is reflected in financial statements in which the interest coverage ratio is less than one.

The term zombie companies were first coined by Edward Cain of Boston College in the late eighties when he tried to describe banks that were allowed to continue their activities despite being liquidated due to losses on commercial mortgages. Whether the entity is a company or a zombie bank, the principle is the same; these entities can continue to operate in the hope of one day returning to life.

The term reappeared in the analyses of Ricardo Caparello, a professor of economics at the Massachusetts Institute of Technology, in 2008, and then the term became more popular in the United States during the global financial crisis and its aftermath. 

About 15% of listed companies in developed countries were considered zombie companies until 2017, when they increased by about 4% in the late eighties, according to a study conducted by the Bank for International Settlements.

The analyses differ slightly in this regard, as the financial services institution "Goldman Sachs" presented an analysis in 2022, in which it stated that the percentage of zombie companies in the United States may be about 13%.

For its part, the US Federal Reserve showed in a study that the percentage of zombie companies among listed companies was fluctuating at about 10% between 2000 and 2020, with their numbers rising during recessions.

It is noted that high debt servicing costs may contribute to an increase in the number of zombie companies, as increasing those costs is one of the main reasons for converting a company from just being at risk to one of the zombie companies.

It is noteworthy that about 36% of listed development companies in South Korea had difficulties in servicing their debts during the past year, up from 29% in 2021, according to the Bank of Korea, and almost 13% of companies in Japan were considered zombie companies in the year ending March 2022, according to the research company "Teikoku Databank ".

Developments in the US banking sector caused an estimated USD 620 billion in losses across the US banking sector by the end of 2022, and smaller banks also faced the problem of rising costs, as money market funds, known for their higher returns, withdrew deposits from banks.

Local banks are now in a critical situation where they have no choice but to lose billions in funding or raise their deposit rates and reduce their profits, to receive the same fate as the aforementioned zombie companies.

Zombie companies are withdrawing capital that more active and efficient companies could invest in new products and services, in a stagnant investment environment, where the investments of an ordinary company would have increased by 2% on average in 2013, if the share of zombie companies had not changed from its level during 2007, according to the OECD.

Zombie companies are not only dangerous for reducing the volume of investment, but their sudden collapse may also cause huge job losses, reduce consumption and further tighten lending policies, which may push other companies to the brink of collapse.

The Bank for International Settlements warned in a study that there is an 85% chance that zombie companies will remain in their position over the next year, up from about 70% in the late eighties.

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