They stagger along, unproductive yet alive. Neither thriving nor dying, they drain resources that could be used more productively elsewhere. These are zombie companies — firms that earn just enough revenue to service interest on their debt but cannot pay down the principal or invest in growth.
Once rare, zombie companies have multiplied across the globe. Cheap bond debt, enabled by years of ultra-low interest rates and central bank interventions, has kept them on artificial life support. While they survive, they distort markets, misallocate capital, and slow economic growth.
This article explores how zombie companies endure through cheap bond debt, why they matter, the risks they pose to investors, and what happens when their borrowed time runs out.
What Are Zombie Companies?
Definition
A zombie company is typically defined as a firm whose earnings before interest and taxes (EBIT) are insufficient to cover interest payments for an extended period, often three consecutive years.
Characteristics
- High debt levels.
- Chronic low profitability.
- Reliance on refinancing rather than genuine cash flow.
- Little to no investment in innovation or expansion.
The Rise of Zombies
The Era of Cheap Money
Following the 2008 financial crisis, central banks slashed interest rates and purchased trillions in bonds through quantitative easing (QE). This flood of liquidity lowered borrowing costs to historic lows.
- Corporations that would normally fail found they could refinance endlessly at near-zero rates.
- Investors hungry for yield snapped up even risky bonds, enabling weak firms to issue debt cheaply.
COVID-19 Acceleration
During the pandemic, governments and central banks unleashed another wave of stimulus. Emergency lending facilities and bond-purchasing programs further propped up struggling firms, allowing more zombies to survive.
How Cheap Bond Debt Sustains Zombies
1. Easy Refinancing
When old bonds mature, zombies issue new ones at low yields, rolling over debt indefinitely instead of repaying it.
2. Investor Yield Hunger
With government bonds yielding near zero, investors turned to high-yield corporate bonds. Even weak issuers could sell debt at favorable terms.
3. Central Bank Backstops
Programs like the U.S. Federal Reserve’s corporate bond-buying facilities reassured investors, reducing perceived risk and lowering spreads for all issuers.
4. Rating Agency Leniency
To avoid mass downgrades, rating agencies often delayed or softened cuts for struggling firms, allowing them continued market access.
Case Studies
U.S. Retail Sector
Several brick-and-mortar retailers, long in decline due to e-commerce, survived years longer by issuing cheap bonds. Rather than restructuring, they limped along until inevitable bankruptcies.
European Airlines
Some airlines, unprofitable even before COVID-19, tapped bond markets with government guarantees during the pandemic. Debt allowed them to stay airborne, but profitability remained elusive.
China’s Property Developers
Chinese real estate firms issued vast amounts of offshore bonds at low yields. When the bubble burst, defaults cascaded, exposing years of zombie-like survival built on debt issuance.
Why Zombies Are a Problem
1. Capital Misallocation
Resources flow to unproductive firms instead of innovative or efficient companies, slowing economic growth.
2. Drag on Productivity
Zombies underinvest in technology or R&D. Their survival crowds out healthier firms and reduces overall productivity.
3. Financial Fragility
When rates rise, zombies are among the first to default, potentially triggering waves of bankruptcies.
4. Investor Losses
Bondholders, especially mutual funds and pensions seeking safe income, may be left holding near-worthless debt.
5. Political Risks
Governments reluctant to let firms fail often use taxpayer funds or guarantees to keep zombies alive, breeding moral hazard.
Why Investors Still Buy Zombie Bonds
- Search for Yield: With safe assets yielding little, investors accept higher risk.
- Too Big to Fail Assumptions: Some zombies are seen as politically untouchable, especially state-linked firms.
- Short-Term Gains: Traders betting on central bank support profit in the near term, ignoring long-term risks.
- Opaque Accounting: Investors may not realize how weak some issuers are until too late.
What Happens When Cheap Debt Ends?
As central banks raise interest rates to fight inflation, the era of cheap debt is ending. Consequences include:
- Refinancing Crunch
Zombies face soaring costs when rolling over bonds. Many cannot afford higher interest payments. - Wave of Defaults
Sectors with high concentrations of zombies — retail, airlines, energy — face bankruptcy spikes. - Investor Losses
High-yield bond funds may suffer steep declines, hitting pensions and individual investors. - Creative Destruction
While painful, defaults may free up resources for healthier firms, boosting long-term productivity.
Historical Parallels
Japan’s Lost Decades
After its 1990s asset bubble burst, Japan kept failing companies alive through cheap credit and bailouts. The result was decades of stagnation, with zombie firms dragging down productivity.
Post-2008 Global Economy
The long era of ultra-low rates worldwide has echoed Japan’s path, creating more zombies than markets realize.
The Hidden Danger: Systemic Risk
Zombie companies are not isolated. Their survival depends on banks, bond markets, and government policies. When zombies collapse:
- Banks face losses on loans and bond holdings.
- Funds see redemptions as investors flee.
- Governments may step in with bailouts, straining public finances.
A widespread zombie collapse could trigger systemic instability — especially if concentrated in key industries.
Can Zombies Be Revived?
Not all zombie companies are hopeless. Some can restructure and return to profitability if debt burdens are reduced. Tools include:
- Debt-for-equity swaps
- Bankruptcy restructuring
- Targeted government support (e.g., for strategic industries like airlines)
But for many, survival on cheap bond debt is simply a delay of the inevitable.
Possible Reforms
- Stricter Credit Standards
Banks and bond markets should resist lending to firms with chronic unprofitability. - Transparent Accounting
Governments must crack down on creative accounting that disguises zombie status. - Market Discipline
Allowing weak firms to fail can clear space for more productive enterprises. - Investor Awareness
Funds should disclose zombie exposure so savers know the risks.
Conclusion
Zombie companies are the walking dead of the global economy. Propped up by cheap bond debt, they stagger on, consuming capital and resources that could fuel healthier growth. For years, low interest rates masked their fragility. But as central banks tighten policy, the artificial life support is ending.
The coming years may see a reckoning: defaults, bankruptcies, and restructurings as zombies finally fall. While painful for investors and workers, this creative destruction may be necessary to restore productivity and stability.
The lesson is clear: cheap debt doesn’t cure weakness — it only delays collapse. And when collapse comes, it is often more painful than if failure had been allowed earlier.
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