A zombie company is one that can’t pay its debts from free cash flow and is forced to keep borrowing to make interest payments. Rising interest rates threaten zombies when their low-interest debt matures and they are forced to finance at higher rates or default.
How Trump Threw a Wrench Into Credit Markets
Tariffs and other policy swings are exposing strains at highly indebted companies
By Telis Demos, The Wall Street Journal, Oct. 9, 2025
Leverage combined with dramatic policymaking is proving to be a volatile mix…
And some companies that are more vulnerable to policy changes, either by the narrower nature of their business, or because they had more fragile financial underpinnings, are feeling it.
That, in turn, is creating headaches for the Wall Street ecosystem that has extended credit to these companies. Many of these businesses aren’t publicly listed or well known. But they are important cogs in the markets they serve, and employ large numbers of people….
Another common factor is a heavy debt load, a risk that some investors worry has been accumulating in an exuberant and fast-growing market for company debts. There are even concerns about cases of fraud, which have sometimes flourished in buoyant markets….
Morningstar DBRS in a September report said that among some of the weakest middle-market borrowers, there hasn’t been “any notable strengthening of operating performance,” and that “this trend may be exacerbated next year by incremental stress from tariffs or further de-acceleration in economic activity.”… [end quote]
Some of these loans show up in the Federal Reserve database of junk bond yields (CCC and below). But many others are private equity loans that are not regulated and not tracked.
Wendy