Today's chart shows that the share of the so-called zombie companies in OECD countries rose to a new all-time high of around 16% last year. A zombie company is defined as a company whose average operating profit for the last three years is lower than the interest cost of financial debt. Such a company does not generate sufficient cash flow even for interest payments, let alone for principal payments from debt. On the contrary, they must continue to borrow newly to repay interest on the financial debt. The economy of such companies is clearly unsustainable in the long run.
From a macroeconomic point of view, it would be appropriate for such a company to go bankrupt and free up scarce economic resources for use in more productive businesses. At the same time, these companies are literally dependent on record low interest rates. If interest rates were to rise sharply, zombie companies would run into major financial problems very quickly. This also suggests that a significant increase in key interest rates of key central banks is certainly not on the agenda at the moment. In any case, the problem of zombie companies does not have a simple solution. Zombie companies are also likely to reflect the possible impending end of the global debt supercycle.
Michal Stupavský
Investment Strategist at Conseq Investment Management, a.s.