OK, OK, that may be a little dramatic. But the Fed has been warning about “zombie” companies with so much low-interest debt that they can barely meet the interest payments since 2021. When their bonds mature and must be rolled over at higher interest rates the Zombie Apocalypse will arrive. Look at the way junk bond yields doubled between 2021 and today.
The WSJ is just beginning to report on this situation in an obscure article wayyy down the page.
Higher Rates Are Coming for U.S. Companies
The interest-rate burden on most firms is still exceedingly low, but this will start to change over the next year
By Justin Lahart, The Wall Street Journal, March 28, 2023
…
S&P Global Ratings analysts recently calculated there is a manageable-seeming $504 billion in U.S. nonfinancial corporate debt maturing this year. That will be followed by $710 billion in 2024, $862 billion in 2025 and $880 billion in 2026. Since companies usually refinance their debt 12 to 18 months before it matures, the effect of that overhang of maturing debt could come sooner than many investors realize.
Moreover, the amount of debt maturing over the next year isn’t negligible. In a recent examination of 75 nonfinancial firms in the S&P 500 that have filed annual reports since this past fall, financial-data firm Calcbench found that debt maturing this year amounted to $73.6 billion. The weighted average interest rate on that debt was 2.65%, a much lower rate than any company can borrow for any amount of time now… [end quote]
If the Fed doesn’t cut interest rates to zero in the next few years (which is unlikely) companies will be forced to roll over their debts at a higher interest rate or possibly retire the debt by issuing new equity. Both of these are bad for investors. Some companies may default on their debts and/ or be bankrupted.
The Fed estimated in 2021 that almost 10% of listed companies are zombies. So the impact of the Zombie Apocalypse could be widespread.
Wendy