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U.S. “zombie firms”—those whose earnings are unable to cover interest payments on their debts—now comprise 620 of America’s 3,000 largest firms, more than one in five, and collectively owe about $900 billion, Bloomberg reported.
The roster includes meme stocks such as AMC Entertainment Holdings as well as familiar names such as American Airlines. ExxonMobil was on the list until recently higher oil prices crossed it off.
The U.S. Federal Reserve’s artificially low interest rates and willingness to buy bonds indefinitely over the last 14 years made it possible for these undead businesses to borrow enough to survive, even during the COVID War.
Now that interest rates are climbing, costs are rising, and the Fed is closing its wallet, these companies face shrinking margins, higher payments on the money they owe, and fewer prospects for refinancing their debt.
Stock markets already are seeing the risk: share prices for zombies in the Russell 3000 index have sunk an average of 36 percent over the past 12 months, while the typical company listed in the broader index has given up just 4.3 percent, Bloomberg’s data show.
“The end result could be a prolonged stretch of bankruptcies unlike any in recent memory,” Bloomberg said.
Cruise-ship line Carnival sold $1 billion of eight-year notes with a 10.5-percent yield in May; seven months earlier, it raised double that amount by offering just 6 percent.
Carnival will have its entire fleet at sea by the end of the year and is working to restructure its debts, the company told Bloomberg.
American Airlines expects to turn a profit this quarter, a company spokesman said.
Companies with S&P credit ratings of BBB and lower or Baa3 from Moody’s—junk-bond territory—have been able to raise only $56 billion in the bond market so far this year, less than a quarter of their haul a year earlier, Bloomberg noted.
May’s $2.2-billion total is the slowest junk-bond market since 2002, according to Bloomberg.
As some zombies go to bankruptcy court and die, others will take their place as rising costs, higher interest rates, and tighter money moves more corporations to the brink, Noel Hebert, director of credit research at Bloomberg Intelligence, pointed out.
TREND FORECAST: As we have long noted, it was record low interest rates that ratcheted up these “zombies.” Since the COVID War began in 2020, equities and economies have been artificially pumped up with cheap money to keep the money junkies gambling. The higher interest rates rise, the deeper the “zombies,” SPACS and sectors dependent on low interest rates will fall.