Zombie companies are firms that earn just enough money to continue operating and service their debt obligations. However, they lack the financial health to pay off their debt fully. These companies often exist in a state of financial limbo, kept alive primarily through low-interest rates and continued lending from financial institutions.
Types of Zombie Companies
Chronic Zombies
Chronic zombies are companies that have been in a financially distressed state over an extended period. They often rely on rolling over existing debt and new loans to survive but show no signs of financial recovery.
Cyclical Zombies
Cyclical zombies appear during economic downturns or specific industry challenges. These companies may become financially distressed temporarily and have the potential to recover when economic conditions or industry-specific adversities improve.
Special Considerations
Impact on the Economy
Zombie companies have several negative implications for the economy:
- Resource Allocation: They tie up capital and resources that could be used by more productive and innovative companies.
- Market Distortions: Their continued existence can distort market competition, leading to inefficiency in the allocation of resources.
- Financial Stability: They contribute to systemic risks within the financial system, given their precarious financial state.
Identifying Zombie Companies
Financial analysts typically use certain metrics to identify zombie companies, such as:
- Persistent inability to cover interest expenses from earnings before interest and taxes (EBIT).
- Continuous reliance on debt rollovers.
Historical Context
The term “zombie company” gained prominence during the Japanese asset price bubble in the 1990s. Many Japanese banks continued to support insolvent, non-performing companies, leading to prolonged economic stagnation, known as the “Lost Decade.”
Applicability in Modern Financial Analysis
COVID-19 Pandemic Impact
During the COVID-19 pandemic, many companies turned into zombies due to unprecedented economic shutdowns and disruptions. Governments and central banks provided emergency funding and low-interest loans, which kept many companies afloat despite poor financial health.
Comparisons
Zombie Companies vs. Insolvent Companies
- Zombie Companies: Can service debt but cannot pay it off.
- Insolvent Companies: Unable to meet debt obligations and often headed towards bankruptcy.
Related Terms
- Debt Servicing: Debt servicing refers to the process of making regular payments on debt, covering both interest and principal repayments.
- Financial Distress: A condition where a company experiences difficulty in meeting its financial obligations, leading to operational constraints.
- Non-Performing Loan (NPL): A loan in which the borrower is in default or close to being in default, often held by zombie companies.
FAQs about Zombie Companies
Can a zombie company recover?
Yes, if the company can improve its earnings, reduce debt, or refinance under favorable terms, it may recover from its zombie status.
Why do banks continue to lend to zombie companies?
Banks may continue lending to avoid realizing losses on existing loans and maintain relationships or due to economic policies encouraging lending.
References
- Hoshi, T., & Kashyap, A. (2004). Japan’s financial crisis and economic stagnation.
- Caballero, R. J., Hoshi, T., & Kashyap, A. K. (2008). Zombie lending and depressed restructuring in Japan. American Economic Review.
Summary
Zombie companies represent a significant challenge in the financial and corporate landscape. While they manage to survive by servicing debt, their inability to pay it off fully signals a troubling inefficiency within the economy. Understanding the characteristics, implications, and context of zombie companies is crucial for policymakers, financial analysts, and investors aiming to navigate and address the underlying issues within the financial system.
