Garnet Capital Advisors Blog

Over the past decade, the number of "zombie" companies has been on the rise. What does this mean for the economy and lending as a whole? Read on to find out.

POST:

An increasing number of zombie companies has risen, with approximately 13 percent of companies currently struggling to make debt payments and stay afloat.

Thanks to a very low interest rate environment over the past few years, "zombie" companies have been creeping up in numbers.

In fact, a recent report from Bank of America Merrill Lynch - as reported on CNN Business - shows that 13 percent of companies are drowning in debt and barely able to pay their bills.

These so-called zombie companies are those that are only able to earn enough money to cover operational costs and pay their bills, though they don't bring in enough to actually pay off their debts in full. Companies in this category are particularly dependent on banks and lenders for ongoing financing, placing a burden both on themselves as well as the lenders who serve them as a result of increased risk.

That said, the number of zombie companies that has grown over the recent past still has not reached its peak during the Great Recession in the late 2000s and early 2010s. But the rise in these types of companies is still somewhat surprising given the strength of the global economy in 2018.

With the historical lows in interest rates that we've seen over the recent past, it's much easier for companies to borrow funds on the cheap. Further, very low rates make it more likely for investors to take a gamble on high-risk companies that might not have robust financials.

For nearly a decade, The Federal Reserve kept interest rates at near-zero levels, making it more easier for companies to handle debt. At the same time, the central bank's balance sheet was expanded to $4.5 trillion.

And recently, the Fed put a hold on increasing rates last month as a result of sluggish rates on growth in the economy.

While leveraging borrowed funds is a great way for companies to grow, and even boost the global economy, zombie companies pose a unique conundrum. The money loaned out to zombie companies is almost like throwing money away, as the resources being used to keep these businesses afloat could be lent to others.

So many companies in "zombie" status does not paint the picture of a healthy economy.

Zombie companies require constant access to borrowed capital on an ongoing basis. There's no end in sight when it comes to reaching a point of being financially strong enough to grow and rely less on loans.  

The report found that zombie companies are more likely to remain in their current state for longer periods of time instead of climbing out through bankruptcy. And while this might not necessarily be a huge problem if interest rates stay low, the issue could blow up as rates rise into the future.

Zombie companies might have their own issues to contend with, but the rise of these types of companies poses a situation for the financial institutions that lend large sums of capital. Given the current situation with heavily-indebted companies, banks and lenders would be well-advised to take a closer look at their loan portfolios and assess which assets should stay and which ones should go.

At Garnet Capital, we can help your financial institution carefully assess its loan portfolio and sell off any distressed or at-risk assets, which, in turn, can help make them strong enough to withstand any potential future uncertainties in the economy.

Browse white papers today to stay on top of economic news that directly impacts the lending industry.