Approach of the Zombie Apocalypse

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

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Anybody have any idea of any Zombie firms? I thought Fubo might be one but looking at their balance sheet it looks like they are not burning cash fast enough and their debt is backed up by their shares. So they could hang on for a long time.

Andy

Oh, maybe Boeing, a combination of very large losses, several years in a row, Billions in interest expense and negative equity. Things could go pear-shaped in a hurry. Of course, TBTF don’t go BK anymore. They hold their employees hostage to demand a government bailout.

Mickey D’s at least has the virtue of making a profit. If their interest expense rose sharply, they could at least suspend the dividend. BA suspended it’s divi a couple years ago.

Steve

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Here is a list from last month of the largest zombie firms. The largest is Mattel, the only one with a market cap greater than $5 billion.
https://finbox.com/ideas/zombie-companies-list
DB2

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Thanks Steve and DrBob, who would have thought Boeing and Mattel would be on the list.

Andy

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Steve,

This is interesting. Boeing has a very high negative debt to equity ratio. Really bad.

The irony here is the company for a very long time has had a bad ratio. Reminds me of a sort of never really profitable Amazon before the server farms, the cloud. Just run the business as profit loss neutral. While Boeing is not neutral it is like the water company. By the time the capital outlay for the plant has been paid off the plant needs to be rebuilt all over again. Infrastructure costs capital. It can run very long term at no really profit.

BA to zero? I would not hold my breath like a zombie.

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