In popular fiction, zombies are the walking dead.
A “zombie company” is one that makes just enough money to stay afloat, and to pay the interest on its debts. However, it doesn’t make enough money to expand or invest, or to reduce the level of its debts.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
In other words, it’s neither alive nor dead – it’s just shambling along, dependent on the ongoing indulgence of its lenders to survive.
This leaves it highly vulnerable to the slightest economic shock.
What makes a zombie company? It has to be reasonably mature. Young firms are often loss-making, but that’s because they are at the “invest and build” stage of development.
The company also has to be chronically loss-making rather than in temporary difficulties – in other words, there is no obvious way out of its situation.
A 2018 study from the Bank for International Settlements (which is basically a central bank for central banks) found that the percentage of zombie firms around had risen from just 2% in the late 1980s to 12% by 2016.
The biggest factor driving this rise was the long-term slide in interest rates seen in recent decades.
Lower interest rates enable struggling companies to reduce their interest payments, allowing them to shuffle on for a bit longer. A low interest-rate environment also means investors are more willing to lend to such companies, simply to make any sort of return on their money.
However, this desperate “reach for yield” simply enables the survival of more zombie companies. Eventually this can be a big problem for the economy as a whole, as it makes the overall economy more fragile.
Some argue that zombies also impair the vital process of “creative destruction”. If low quality companies plod on rather than going bankrupt, it means that they crowd out younger, potentially more dynamic companies that don’t have the same access to resources that they do. As a result, the economy becomes less efficient and productivity falls.
To learn more about the debate around zombie companies and what to do about them, subscribe to MoneyWeek magazine.
-
Green mortgages: how do they work and how much can you save?Most high-street lenders now offer some kind of green mortgage deal. We look at who’s eligible, how to apply and the mortgage rates and cashback on offer
-
Rachel Reeves urged to avoid pension tax relief raid or risk ‘Omnishambles Budget’It might seem like low-hanging fruit, but cutting pension tax relief would be a dangerous move for the chancellor, says former pensions minister Steve Webb
-
What are wealth taxes and would they work in Britain?The Treasury is short of cash and mulling over how it can get its hands on more money to plug the gap. Could wealth taxes do the trick?
-
UK bank stocks are no bargain – here's a safer alternativeOpinion Britain's banking sector faces severe political risks. Switch into this global financials trust instead, says Max King
-
Gold mining stocks outperform gold – can it last?Opinion Gold miners are shining brighter than the yellow metal for the first time in this cycle. Enjoy the ride while it lasts, says Cris Sholto Heaton
-
The AI barons call time on the bubbleOpinion OpenAI's Sam Altman and other tech giants are warning that the AI boom is reaching dangerous territory. They may end up as the authors of their own demise
-
Three small companies with big potentialOpinion Nish Patel, portfolio manager of The Global Smaller Companies Trust, picks three small companies where he'd put his money
-
Automatic Data Processing is making big profits from organising offices – should you invest?Automatic Data Processing has established itself as a one-stop shop for managing the workplace. Is it a sound long-term investment?
-
Crypto mogul Do Kwon pleads guilty to fraudSouth Korean entrepreneur Do Kwon, who used to call critics cockroaches, faces a long spell in jail after pleading guilty to fraud relating to the collapse of two digital coins
-
How multi-asset trusts can help you deal with volatilityMulti-asset trusts help navigate global uncertainty and provide investors with an added layer of protection through diversification
