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Of Zombie Companies

author
Ava Flores
• Sunday, 09 May, 2021
• 8 min read

More than 200 corporations have joined the ranks of so-called zombie firms since the onset of the pandemic, according to a Bloomberg analysis of financial data from 3,000 of the country’s largest publicly-traded companies. The Federal Reserve’s effort to stave off a rash of bankruptcies by purchasing corporate bonds might very well have prevented another depression.

zombie companies myth reality update
(Source: www.slideshare.net)

Contents

But in helping hundreds of ailing companies gain virtually unfettered access to credit markets, policymakers may inadvertently be directing the flow of capital to unproductive firms, depressing employment and growth for years to come, according to economists. “We have come to the point that we should ask, ‘what are the unintended consequences?’” said Torsten Slow, chief economist at Apollo Global Management Inc. “The Fed, for stability reasons, decided to step in.

Zombie companies get their nickname because of their tendency to limp along, unable to earn enough to dig out from under their obligations, but still with sufficient access to credit to roll over their debts. They’re a drag on the economy because they keep assets tied up in companies that can’t afford to invest and build their businesses.

Many firms that have seen earnings wiped out due to the coronavirus outbreak are likely to rebound once a vaccine allows the global economy to return to a more normal footing, and may ultimately not need all the debt they raised. Yet the sheer amount of borrowing undertaken by struggling corporations in recent months will almost certainly limit the capacity of some to make capital expenditures and adapt to shifting consumer habits as Covid-19 alters how Americans spend their money.

Bloomberg’s analysis looked at the trailing 12-month operating income of firms in the Russell 3000 index relative to their interest expenses over the same period. “ Zombie firms have been building due to lax markets that provided staying power for seemingly insolvent companies.

Nearer term, because zombie firms exhaust value, credit-recovery assumptions should go lower, which arguably should send spreads higher to compensate.” A spokesperson for Boeing directed Bloomberg to the company’s third quarter earnings call, in which Chief Financial Officer Greg Smith said that managing liquidity and balance-sheet leverage are top priorities, and reducing debt will be a key focus once cash generation returns to more normal levels.

zombie companies innovation irish
(Source: irishtechnews.ie)

Exxon referred Bloomberg to comments last month from senior vice president Andy Swinger during the company’s earnings call in which he highlighted the oil producer’s efforts to reduce operating expenses and increase divestment while keeping gross debt levels stable. A spokesperson for Macy’s said that the company is confident in its financial position, and expects to have sufficient liquidity to fund operations and retire debt maturities due in the coming years.

Economists have long warned that zombies are less productive, spend less on physical and intangible capital and grow less in terms of employment and assets than their peers. “The zombie disease seems to cause long-term damage also on those that recover from it,” the BIS’s Ryan Bakeries and Boris Hoffmann wrote in the report.

While they accounted for 41% of U.S. firms in a UBS Group AG analysis based on their interest-coverage ratios as of the second quarter, weighted by assets the percentage declined dramatically, to just 10%. And when using the bank’s preferred methodology, which looks at debt to enterprise value, the share fell to just 6%, close to average levels since the late 1990s.

“The zombie question is one of the great open issues regarding the legacy of the pandemic,” said Nathan Sheets, chief economist at PRIM Fixed Income. Still, corporate deleveraging in the years ahead will result in slower growth, subdued inflation and low rates “for as long as the eye can see,” he added.

(Corrects figures in headline, fourth, 12th and 18th paragraphs as well as charts of Nov. 17 story to reflect additional companies that didn’t cover their interest costs.) Few would dispute that the Federal Reserve’s enormous doses of monetary medicine this year were necessary to alleviate the worst economic impacts of the coronavirus pandemic.

zombie apocalypse company
(Source: freeworldeconomicreport.com)

But every treatment comes with risks and side effects, and the aggressive intervention by the U.S. central bank added significantly to the ranks of the corporate walking dead, as I call it. These so-called zombie companies continue to muddle along in a financial twilight zone because near-zero interest rates are driving investor appetite for risk while allowing faltering businesses to keep tapping capital markets for the cheap cash they need to make up the shortfall between lackluster earnings and the money needed to pay interest on their debt.

Rather than being limited to small, little-known enterprises, zombies include names such as security services player ADT Inc. ride-share company Uber Technologies Inc. oil-drilling expert Transocean and movie-theater operator AMC Entertainment Holdings Inc. While some of these companies are in sectors that have been hit hard by the pandemic, Tesla Inc. Wayfair Inc. and Roku Inc. are also among the household names whose earnings before interest, tax, depreciation and amortization (EBITDA) don’t cover debt payments.

Investors are willing to fund biotech such as Moderna Inc. that are in the earlier, less profitable phases of their life cycle in the expectation that innovative products will prove to be sustainably cash generative over the long term. Despite the inherent risks, the prospect of an efficacious vaccine validating MARA’s platform technology has fueled the company’s market capitalization to $39 billion.

U.S. corporate bond issuance almost doubled to $1.45 trillion in the first nine months of 2020 from the same period a year earlier, with high-yield accounting for a record $346 billion through the first week of October. Short-term management thinking likely contributed to the predicament many zombies find themselves in, and such companies, with median net debt running at 4.8 times EBITDA, are unlikely to take a long-term view now that the imperative is to survive at all cost.

Adobe Inc. and ServiceNow Inc. are examples of software providers with strong management and IP that operate in spaces that are benefiting from the digitization of the global economy. Health care is a sector that seems likely to benefit from increased spending, which may boost companies such as diagnostics and pharmaceutical supplier Thermos Fisher Scientific Inc. while animal medicines' maker Poetic Inc. is also proving to be resilient as pet owners prioritize the welfare of their furry friends regardless of financial stress.

zombie businesses infographic came companies dead credit
(Source: blogs.payscale.com)

The more prudent approach is to avoid the walking dead altogether and back resilient, high-quality businesses with low leverage that can meet their obligations. From Boeing Co., Carnival Corp. and Delta Air Lines Inc. to ExxonMobil Corp. and Macy’s Inc., many of the nation’s most iconic companies aren’t earning enough to cover their interest expenses (a key criterion, as most market experts define it, for zombie status).

Almost 200 corporations have joined the ranks of so-called zombie firms since the onset of the pandemic, according to a Bloomberg analysis of financial data from 3,000 of the country’s largest publicly-traded companies. But in helping hundreds of ailing companies gain virtually unfettered access to credit markets, policymakers may inadvertently be directing the flow of capital to unproductive firms, depressing employment and growth for years to come, according to economists.

“We have come to the point that we should ask, ‘what are the unintended consequences?’” said Torsten Slow, chief economist at Apollo Global Management Inc. “The Fed, for stability reasons, decided to step in. Zombie companies get their nickname because of their tendency to limp along, unable to earn enough to dig out from under their obligations, but still with sufficient access to credit to roll over their debts.

Many firms that have seen earnings wiped out due to the coronavirus outbreak are likely to rebound once a vaccine allows the global economy to return to a more normal footing, and may ultimately not need all the debt they raised. Yet the sheer amount of borrowing undertaken by struggling corporations in recent months will almost certainly limit the capacity of some to make capital expenditures and adapt to shifting consumer habits as Covid-19 alters how Americans spend their money.

Bloomberg’s analysis looked at the trailing 12-month operating income of firms in the Russell 3000 index relative to their interest expenses over the same period. The $1.36 trillion they collectively now owe dwarfs the $378 billion of debt zombie firms reported before the pandemic laid waste to balance sheets.

(Source: www.businessinsider.com)

A spokesperson for Boeing directed Bloomberg to the company’s third quarter earnings call, in which Chief Financial Officer Greg Smith said that managing liquidity and balance-sheet leverage are top priorities, and reducing debt will be a key focus once cash generation returns to more normal levels. Exxon referred Bloomberg to comments last month from senior vice president Andy Swinger during the company’s earnings call in which he highlighted the oil producer’s efforts to reduce operating expenses and increase divestment while keeping gross debt levels stable.

A spokesperson for Macy’s said that the company is confident in its financial position, and expects to have sufficient liquidity to fund operations and retire debt maturities due in the coming years. Economists have long warned that zombies are less productive, spend less on physical and intangible capital and grow less in terms of employment and assets than their peers.

“The zombie disease seems to cause long-term damage also on those that recover from it,” the BIS’s Ryan Bakeries and Boris Hoffmann wrote in the report. While they accounted for 41% of U.S. firms in a UBS Group AG analysis based on their interest-coverage ratios as of the second quarter, weighted by assets the percentage declined dramatically, to just 10%.

And when using the bank’s preferred methodology, which looks at debt to enterprise value, the share fell to just 6%, close to average levels since the late 1990s. “The zombie question is one of the great open issues regarding the legacy of the pandemic,” said Nathan Sheets, chief economist at PRIM Fixed Income.

Still, corporate deleveraging in the years ahead will result in slower growth, subdued inflation and low rates “for as long as the eye can see,” he added. “ Zombie firms have been building due to lax markets that provided staying power for seemingly insolvent companies.

zombie 1979 imdb title
(Source: www.imdb.com)

The Fed has pumped over $4 trillion into the economy through different programs but largely with buying up the bonds of corporate America. That $4 trillion money printing scheme has forced interest rates to zero and created a borrowing bonanza.

It’s a kind of financial life-support because even with no earnings, they can just borrow money to keep paying costs and interest on debt. Twenty or thirty years of zero stock returns, negative wage growth and a walking dead economy.

Unfortunately, there’s not a lot you can do to stop this all from happening, but you can protect your own investments by being able to recognize the worst of the Zombie companies. Now technically, most analysts will look at what’s called EBITDA or earnings before taxes, depreciation and amortization to compare against the interest expense.

You’ve got a lot of oil companies and this is where many of the bankruptcies have already started with that crash from $60 per barrel to negative prices last spring. Not all of these companies are in danger of turning full-blown zombie but the longer the pandemic lasts, the closer you need to watch your portfolio.

Our first Zombie Stock probably won’t come as a surprise, billion-dollar retailer Bed, Bath & Beyond, ticker BABY. Shares of the home furnishings' retailer have been falling since 2013 with multiple turnaround attempts and hundreds of closed stores.

zombie market
(Source: www.profit-pilot.com)

A new CEO took over last November, offering a new turnaround strategy, but plans got postponed with the Coronavirus and the company is now in survival mode. The company operates 1,500 locations across North America, many of which are in malls struggling to bring customers back.

It’s estimated to have about 10% of the U.S. market share for home furnishings but that’s falling each year as more sales go online. The company owns a lot of smaller brands like Cost Plus and Buyout Baby that it can sell off for quick cash but that’s only going to help for so long.

I’m going to piss off a lot of Atlanta fans but billion-dollar Liberty Braves Group, ticker BARK, is next on our list. The publicly-traded owner of the Atlanta Braves gets most of its revenue from ticket sales, concessions and broadcasting rights…and that’s going to be a pretty slim business for a while.

Shares have actually done well since the 2016 IPO, rising about 70% over the period to December 2019 but limited revenue and $690 million in debt makes it tough to see any upside here. The stock could get a sentiment boost late summer with a recertification of the 737 Max, but it won’t help much if airlines don’t need the planes.

American Airlines has already told the company it won’t take delivery of 17 planes if Boeing cannot offer financing for the purchase. The company has reported a loss of $6.3 billion over the last year plus the $860 million it’s paid in interest on debt.

punch fire vs zombieman comic
(Source: comicvine.gamespot.com)

Another problem is the amount of money it’s going to cost to pay that interest and shrink debt means Boeing won’t be able to reinvest much into plane development for years. Airbus already has two planes in development that have no competition at Boeing and could mean the European giant eats away at more market share.

The aerospace giant could still operate even after it wipes out shareholders and even if it escapes bankruptcy, the shares could be dead money for years. Zombie companies are a risk after every economic recession and the amount of money pumped into the system this year means it’s going to be even worse.

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5 timmytomcat.blogspot.com - https://timmytomcat.blogspot.com/2018/03/chewy-influencer-nutro-wild-frontier.html