Will the Post-Pandemic Economy See a Zombie Company Apocalypse?

In the early stages of the COVID-19 pandemic, many people saw similarities between the global shutdown and the apocalyptic zombie movies which have been popular over the past two decades. Now that vaccinations have been widely distributed and restrictions on normal life are disappearing, investors should be aware of the many zombie companies which are staggering into the post-pandemic world.

The Growth of Zombie Companies

Zombie companies are heavily indebted companies that lack the means to pay off the principal on their debts. The phrase first became popular in the early 1990s when many Japanese companies were considered too big to fail and became reliant on bailouts from banks.

Japan experienced a huge stock market bubble in the late 1980s. The bubble burst in 1992 and Japan then entered a “lost decade” of sluggish economic growth. While Japan was plagued with zombie companies during the country’s asset price bubble, only 2% of firms worldwide were considered zombie companies in the late 1980s.

The financial crisis in 2008 began a worrying trend in companies taking on unserviceable debts. Analysis from Bloomberg claimed that American companies had taken on debts totaling $1.58 trillion at the peak of the financial crisis.

A decade of historically low interest rates followed the 2008 financial crisis, encouraging companies to take on ever larger debts. The Bank of America Merrill Lynch warned in 2019 that as many as 13% of all the world’s companies had become zombie companies that lacked the means to service anything more than the interest on their debts.

The Pandemic Adds Hundreds of Companies to the Zombie Hordes

The total debt obligations of America’s largest companies fell from its peak of $1.58 trillion in 2008 to a low of $320 billion in 2011. The pandemic has seen this trend reverse dramatically. A Bloomberg survey of America’s 3,000 largest companies published in November 2020 found that the collective debt of these companies had soared to $2 trillion since the beginning of the pandemic.

The same Bloomberg report found that 200 of America’s top firms had become zombie companies. Included among the growing zombie horde were such household names as Boeing, Delta Air Lines, Exxon Mobil, and Macy’s.

COVID-19 has had an unprecedented impact on the global economy. The United States is far from the only country to have seen zombie companies explode in numbers during the pandemic. Analysis from Refinitiv found that more than a quarter of the companies listed on the London Stock Exchange’s FTSE 350 index became zombie companies during 2020.

Can Zombie Companies Recover?

On the surface, the prospect for a total economic recovery from the depths of the COVID-19 pandemic looks good for many of the world’s largest economies. The United States economy contracted by 31.4% in the second quarter of 2020. The third quarter of 2020 saw a massive rebound, with economic growth hitting 33.4%. The United Kingdom has seen its highest quarterly growth figures since the end of the Second World War.

However, many zombie companies will be staggering out of the pandemic in a much worse shape than they entered it. Companies with large debt obligations find it very difficult to invest in growth. They also lack the means to respond to any further unexpected setbacks in the future.

Many companies have tried to reduce costs to offset their mounting debts and falling income during the pandemic. International Consolidated Airlines Group, which is the parent company of some of Britain and Spain’s largest airlines, reduced its fleet of planes by more than 10% during the pandemic. At the same time, the conglomerate’s debts ballooned by 28.9%. Companies such as this have both reduced their capability to earn more in the future and massively increased their necessary outgoings.

Air travel has been one of the sectors hardest hit by the pandemic. Bloomberg’s analysis found that all four major U.S. airlines became zombie companies in 2020. The total debt obligation of these four airlines reached $128 billion by the end of the year. Aerospace giant Boeing increased its debt obligations by $32 billion during 2020.

Are We Facing a Zombie Company Apocalypse?

The enormous growth of zombie companies could likely have long-term negative effects on all the world’s major economies. Money that could be used to stimulate economic growth will instead be rerouted to helping zombie companies service their ballooning debt.

The longer a company remains in zombie territory, the harder it is to recover. Japan’s Lost Decade which followed the country’s zombie apocalypse in the 1990s should be a stark warning of the consequences of letting the zombie company problem go unsolved.