Devesh Vaswani, finalist of the Ontario Writing Workshop
April 1st, 2023
What Exactly Are Zombie Companies?
Zombie corporations are indebted corporations with barely enough income to pay the interest on their debts after covering operational and fixed expenses. As a result, these companies often rely on debt refinancing or a lump sum of Venture capital (V.C.) fundraising rounds to stay afloat. (In layman's terms: If a company can't get more money, it will go BOOM!!)
These businesses are frequently exposed to high borrowing rates and may be one event—market shock or bad fiscal performance—away from bankruptcy or a bailout.
In addition, these businesses thrive when the interest rate is low, as borrowing becomes less expensive, and struggle greatly when the interest rate is high, as borrowing becomes more costly.
So, as interest rates hicks continue to shatter records, these companies are getting closer to exploding, and to clarify better, let's look at two zombie companies, Uber and AMC.
However, before we continue, let's clear the air on this subject:
The First time a "zombie company" emerged was in Japan.
Japan, a fast-growing powerhouse until the 1980s, experienced a financial crisis and recession in 1990, coined the "Lost Decade." Following the collapse of the Japanese asset price bubble in late 1991, Japanese banks began to assist weak or failing businesses rather than allowing them to fail. During this period, bloated, inefficient, or failing companies relied on bank financing to continue operations. This also led to financial resources being redirected away from viable companies towards zombie ones.
Following the 2008 financial crisis, the United States Federal Reserve implemented years of loose monetary policy characterized by quantitative easing, high leverage, and historically low-interest rates to revitalize economic growth. As a result, an increasing number of businesses are dependent on increasing borrowings rather than increasing earnings, resulting in More than 600 U.S. companies in the Russell 3000 index — the 3,000 largest publicly traded corporations in the United States — have been designated as zombies, defined as not producing enough money to pay the interest on their debt. Furthermore, these corporations happen to control nearly 2.2 million jobs in the country, making them "too big to fail" zombie corporations.
You see, most of these should have been wiped out during the 2020 Covid crisis, But they didn't, thanks all to CARES Act which mobilized 2.2 trillion dollars in economic stimulus. As a result, economic stimulation kept these businesses afloat during the pandemic, breaking the business cycle once more.
The cycle of life for business:
"A company which starts as a small company with the idea to provide economic value.
It Grows!
But then, it dies when it no longer provides a value economy.
However, a zombie company never dies (except when it is killed).
It becomes a Leech to the economy and drags its potential down."
AMC Entertainment - The Walking Dead
Meme stock darlings AMC Entertainment Holdings is a prime example of a Zombie corporation. AMC is one of the world's largest movie theatre chains, with $5.4 billion in long-term debt and a market value of $2 billion (which is bloated by it being Meme stock). AMC also has burnt $6.8 billion in debt service since 2014, yet its debt has only grown. Furthermore, THEY HAVE MORE LIABILITIES THAN ASSETS! which in a normal company means it's going bankrupt the next day.
But AMC is still alive, if not in good condition, and able to stumble along with the economy, thanks to low borrowing costs, but for how long?
UBER - a New Type of Zombie
When we think about Uber, we picture a wildly successful business that upended the transportation industry as we know it and, at one point, became the highest-valued private startup in the world. However, after 12 years in business, Uber is still far from turning a profit than when it first launched; instead, it is bleeding cash faster than any other startup in history.
Uber's total income was $17.5 billion by the end of 2021. A lot of money, huh? However, its costs and expenses increased to $18 billion, leaving Uber with a net loss of $496 million.
This is after removing all of Uber's unprofitable expansion:
· GONE is Uber's self-driving taxi!
· GONE is Uber's Urban Taxi Drone!
Also, Uber has a $9.2 billion long-term debt. And, once again, THEY HAVE MORE LIABILITIES THAN ASSETS!
As long as venture capitalists and investors continue to back Uber, the company will be able to keep operating. However, the company is doomed if Uber's confidence wanes before it earns enough to cover the interest on its amassed debt.
Furthermore, Uber is a different kind of zombie company because it depends on investors, not banks, to keep paying for its cash needs. Investors are willing to do this because they think Uber will one day become the Amazon of transportation and make billions of dollars in profit. But that is a dream; Amazon became profitable eight years in; Uber? Probably never.
What's next?
As the interest rates rise, some zombie companies which are deeply debited will end up in bankruptcy, effectively killing them.
But new ones will emerge as inflation pushes more companies into desperation and debt, according to Noel Hebert, director of credit research at Bloomberg Intelligence.
"The combination of interest-rate hikes and inflation will produce more zombies, (and) By year-end, we'll have more."
I am going to leave you with this:
"Is the government attempting to save the economy by not allowing zombie companies to die, or is it attempting to slow the economy in the long run by supporting zombie companies?"
Source: