Zombie Companies
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Zombie Companies

Zombie companies, a term that originated in Japan post the 1991 Japanese asset price bubble, and regained popularity post the 2008 financial crisis. The term "Zombie" refers to young companies aged at least 10 years and cannot cover their debt serving costs from profits and are characterized with an interest coverage ratio of less than 1 for at least 3 consecutive years which measures the ability of a company to repay the interest on its outstanding debt. The interest coverage ratio is calculated by dividing the earnings before interest and taxes (EBIT) by the interest expenses. The probability of becoming a zombie triples if a company was previously categorized as so, according to the Bank of International Settlements (BIS).

 

The number of listed zombie firms almost tripled from 2010 to 2020, and as shown below, the percentage of US zombie companies in Russell 3000 in 2020 is around 15 %. Their aggregate value increased by 200 % in 2020 compared to 2019 due to the Covid-19 pandemic, exceeding USD 6 Trillion. In 2020, a record of 66 % of the zombie companies' loans had the lowest quality segment with an S&P rating of a single B or less. Examples of zombie companies are Boeing (BA), Bloom Energy Corporation (BE), Sunrun Inc. (RUN) with annual interest coverage ratios of less than one for the past 3 years.