“Zombie companies” may do little harm to the US economy
Fears that the US is being overrun by corporate zombies may be exaggerated.
Fears that the US is being overrun by corporate zombies may be exaggerated, says Alexandra Scaggs in Barron’s. Many analysts have argued that the US Federal Reserve’s decision to buy junk bonds (debt with a higher risk of default) during the crisis last year helped prop up companies that should have been allowed to fail. “Heavily indebted, cash-strapped firms” have been able to stagger on, “only surviving because of low interest rates”, say critics. Yet the data doesn’t necessarily suggest this is true.
Of course, today’s low rates might still be making firms that could not have covered their interest in 2019 look better, says Tracy Alloway on Bloomberg. But again that’s not obvious: just 17 US junk-bond issuers are expected to be less profitable in 2022 than in 2019, reckons Martin Fridson of Lehmann Livian Fridson Advisors. “It’s true that companies that look viable right now might not necessarily survive the next downturn,” concludes Alloway. But that doesn’t mean there’s harm in them getting a chance to turn things around.
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