On October 31st in the west, as“Monsters” entered communities in search of candy, the credit markets were flooded with“Zombie enterprises”. The number of companies unable to repay debt has surged as interest rates remain high, Bloomberg reported Nov. 1, citing data. “The number of zombie companies in the US has risen to its highest level since early 2022, with nearly 100 new companies added in October alone.”
A zombie business is one that does not generate enough revenue to cover interest payments. In other words, the interest protection multiple (EBITDA divided by interest expense) for these enterprises is less than 1.
The figures show that the rise in zombie companies last month was concentrated in healthcare and biotechnology, which are under pressure from sharply rising costs and a fall in federal subsidies. In addition, by the U. S. Government tariff policy hit some companies also into a“Zombie” state. It is worth noting that many of these enterprises have long been included in the list of zombie enterprises.
The current surge in the number of zombie companies in the United States is mainly due to companies taking advantage of a low interest rate environment that was close to zero during the pandemic to borrow heavily, the economy as a whole has also been hit by US tariffs.
A person from Oaktree capital told Bloomberg that some of the companies’ woes were related to their highly leveraged acquisitions during a period of low interest rates, which seemed reasonable at the time, but as the interest rate environment changed, the acquirers are now saddled with unsustainable debts.
Bloomberg also cited a number of high-profile cases, further revealing the current U. S. companies face enormous debt servicing pressure. Bonds issued last year by a big telecoms company, for example, are now trading below 80 cents on the dollar and yielding close to 20 per cent. Some companies have all but admitted that they can not solve the problem themselves unless their creditors grant them grace.
At the same time, they are likely to find it increasingly difficult to secure new financing. In its October report, S & P Global downgraded its earnings forecasts for speculative-grade corporate issuers this year and next. Earnings forecasts were cut for sectors such as residential builders, oil and gas producers and chemical companies.
According to the analysis of the report, as the U.S. government has recently reached trade agreements with relevant countries to lock down tariff rates, and the Federal Reserve has released a signal that it may suspend further interest rate cuts in December, the pressure on zombie companies is expected to continue to intensify. But even if the Fed keeps cutting rates, the cost of borrowing for small and zombie businesses is now several times higher than the historical average, industry insiders say.
Analysts have warned that there may still be a large number of zombie companies yet to be exposed, and that the scale of the problem may be far greater than market participants generally believe.