Bloomberg
America’s zombie companies make $ 2 trillion in debt
(Bloomberg) – They were once the titans of corporate America. Beloved household names. Successful case studies, but now they look more and more like something else: zombies. And their numbers are increasing: from Boeing Co., Carnival Corp. and Delta Air Lines Inc. to Exxon Mobil Corp. and Macy’s Inc., many of the country’s most iconic companies do not earn enough to cover their interest charges (a major zombie status criterion by most market experts). More than 200 companies have joined since the pandemic began. the so-called zombie companies, according to a Bloomberg analysis of financial data from 3,000 of the largest publicly negotiated companies. In fact, zombies now account for nearly a quarter of those businesses. In fact, they added nearly $ 1 trillion in debt to their balance sheet during that period, bringing total liabilities to $ 1.98 trillion. That’s more than the roughly $ 1.58 trillion zombie companies owed at the height of the financial crisis. The consequences for America’s economic recovery are profound. The Federal Reserve’s attempt to stave off a wave of bankruptcies by buying corporate bonds could very well have prevented another depression. But by helping hundreds of ailing companies gain near-barrier access to credit markets, policymakers could inadvertently divert the flow of capital to unproductive companies, which economists say will put pressure on jobs and growth in the coming years. “We’ve gotten to the point where we should be asking, ‘what are the unintended consequences?’ “said Torsten Slok, chief economist at Apollo Global Management Inc.” The Fed decided to intervene for stability reasons. They knew they were going to make zombies. Now the question becomes, “What about the companies that have been kept alive and that? otherwise would have gone bankrupt? ‘ While zombie companies have been more commonly associated with 1990s Japan, post-crisis Europe, or even China in recent years, their ranks in the U.S. have been growing for over a decade, fueled in part by years of ultra-less monetary policy. nicknamed because of their tendency to limp, not being able to earn enough to get out of their liabilities, but still having enough access to credit to pay off their debts They are a drag on the economy as they lock up assets in companies who can’t afford to invest and build their business. Of course, not every business that becomes a zombie is destined to be one forever. There are plenty of comeback stories, from Boston Scientific Corp. to Sprint Corp. Many businesses whose revenues have been wiped out as a result of the coronavirus outbreak are likely to rebound once a vaccine returns the global economy to normal. dishonor, and ultimately don’t need all the debts they’ve raised. But the sheer amount of loans taken out by struggling businesses in recent months will almost certainly limit the capacity of some to spend capital and adapt to changing consumer habits as Covid-19 changes the way Americans spend their money. Bloomberg’s analysis looked at the lagging 12-month operating income of companies in the Russell 3000 index relative to their interest expense over the same period. The results paint a grim picture. Nearly a quarter of the index, or 739 companies, have not made enough to pay their interest payments. That is compared to 513 companies at the end of last year. The $ 1.98 trillion they now collectively owe dwarfs the $ 1.05 trillion in debt zombie companies reported before the pandemic ravaged balance sheets. Boeing has seen its total liabilities increase by more than $ 32 billion this year, while Carnival’s indebtedness has increased by $ 14.8 billion, Delta added $ 24.2 billion, Exxon $ 16.2 billion and Macy’s $ 1. 2 billion, according to data compiled by Bloomberg. What Bloomberg Intelligence Says: “Zombie companies are building because of lax markets that offer seemingly insolvent companies endurance. The pandemic exacerbated this perennial problem. From an economic theory point of view, zombies slow growth in the long run because you have a misallocation of capital and companies that have market share but are unable to invest in growth. In the short term, as zombie companies are depleting value, credit recovery assumptions should get lower, which should produce arguably higher spreads to compensate. – Noel Hebert, Director of Credit Research A Boeing spokesperson sent Bloomberg to the company’s third-quarter earnings call, in which Chief Financial Officer Greg Smith said managing liquidity and balance sheet leverage are top priorities, and that reducing debt will be a major concern once cash generation returns to a more normal level. Carnival and Delta representatives declined to comment. Exxon referred Bloomberg to the previous comments. month by senior vice president Andy Swiger during the company’s earnings call, highlighting the oil producer’s efforts to reduce operating costs and increase divestments while keeping gross debt stable. a spokesperson for Macy’s said the company is confident in its financial position, and expects to have sufficient liquidity to fund and repay operations i Among the new entrants are all four major US carriers, with a combined debt of $ 128 billion, become zombies in 2020. And entertainment companies on the list grew from 6 last year to 12, adding about an additional $ 13 billion. “We distinguish between the walking wounded and the walking dead,” said Ken Monaghan, a portfolio manager at Amundi Pioneer, who oversees approximately $ 85 billion. “The question is whether the pandemic has changed the business model to such an extent that survival is at stake. Few industries will die, but some will require radical transformation to survive and raise capital. Long-term pain Economists have long warned that zombies are less productive, spend less on physical and intangible capital, and grow less in terms of employment and assets than their own. an economy than previously thought. Not only do companies stay in a zombie state longer than in previous years, but of the roughly 60% of companies that eventually manage to exit zombie status, many nonetheless experience long-term weakness in productivity, profitability and growth, leading to long-term underperformance. In addition, recovered companies are three times more likely to become zombies again compared to companies that have never seen one, according to the September study, which surveyed companies in 14 advanced economies over three decades. “The zombie disease appears to be damaging in the long term as well to those who recover from it,” wrote Ryan Banerjee and Boris Hofmann of the BIS in the report. Therefore, “the viability of a business should be an important criterion to qualify for. support from the government and the central bank. “A Fed representative declined to comment. Some say concerns about the spread of zombie companies are being exaggerated for 41% of US companies in a UBS Group AG analysis based on their interest coverage ratios from the second quarter, weighted by assets, the percentage dropped dramatically, to just 10%, and using the bank’s preferred methodology, looking at debt in relation to enterprise value, the stock dropped to just 6%, close to the average level since the late 1990s. “The zombie problem is pretty benign in the US,” said Matthew Mish, a strategist at UBS. I don’t think the problem looks worse than the last two recessions. ”Others aren’t so sure. “The zombie issue is one of the big open issues regarding the legacy of the pandemic,” said Nathan Sheets, PGIM Fixed Income chief economist. “Will our economy emerging from the pandemic be as dynamic and flexible as before? I am cautiously optimistic because competition is deeply rooted in the American system. Still, corporate deleveraging in the coming years will result in slower growth, moderate inflation and low interest rates “for as long as the eye can see,” he added. Corrects numbers in the headline, fourth, 12th, and 18th paragraphs and graphs of the Nov. 17 story to show additional companies that have not covered their interest expenses.) For more articles like this, visit us at bloomberg.com ahead with the most trusted business news source. © 2020 Bloomberg LP