A Zombie (Firm) Apocalypse?

The term "zombie firm" apparently goes back to at least 1987 but, unsurprisingly, acquired its current popularity with economic and financial commentators amid the twenty-first century's pop cultural obsession with the phenomenon.

In considering it one should note that there is no generally accepted definition of the term "zombie firm." However, the usage generally denotes a firm that is "economically unviable" in a particular way, namely its surviving on the extension of credit it has virtually no hope of ever repaying--such that the firm may be existent beyond the end of its natural life in a condition that, less than fully "alive," may be better understood as simply "undead."

With zombie firms' survival dependent on easy credit the concern that there are many more of them about than usual (and, perhaps, that firms of greater weight than usual fit the zombie profile) naturally grew during the protracted period of extremely low interest rates which followed the 2007-2008 financial crisis--and with it the concern that should the unsustainably ultra-sub market interest rates go up these firms will suddenly find credit no longer so easy, and the undead become simply the dead, the more in as such a surge in interest rates has been underway since early 2022. Should it be the case that there are more zombies about--that those zombies are larger and more central to the economy--then those zombies' being cut off from credit and finally dying out will mean that much more economic pain as a result of the tightening of credit.

Of course, trying to assess the matter in any rigorous way means trying to precisely establish a standard, and here there is, for the time being at least, room for individual judgment--which is to say, also interest and prejudice. Those looking to justify the monetary policy of the last two decades--to say that the ultra-loose monetary policy that prevailed for almost a decade and a half has been beneficent, and that the current rise in interest rates is also essentially beneficent--seem to be inclined to think that zombie firms are not a very big problem. (Indeed, that is what a 2021 Federal Reserve study of the matter argues, while I have seen nothing from this direction to indicate otherwise.*) By contrast others leerier of some part of this trajectory--for instance, Wall Street figures for whom the interest rate can never be low enough unhappy with their current direction, perhaps especially those concerned with sectors that may be more vulnerable than the average (as with venture capital-funded tech, or the real estate sector that may be the country's "most zombified"), display less equanimity about their economic impact.

For the time being the U.S. is not, officially, in recession, and indeed there has been a recent burst of optimism about the possibility of a "soft landing" in the wake of a decade and a half of monetary chaos--but the present trend (which includes a further ratcheting up of the interest rate) suggests that in even the most optimistic view (to say nothing of a less optimistic one that would seem better founded) such companies will find their path getting steeper, in the process revealing just how many zombies really are walking the Earth among us.

* The cited Federal Reserve study used for its standard the classification of a zombie firm as one with "leverage above the sample annual median, interest coverage ratio . . . below one, and negative real sales growth over the preceding three years," which means a company in the unenviable situation of being in the top 50 percent with regard to the ratio of debt to equity; pre-tax and interest earnings that are less than the interest they must pay; and shrinking sales for three years; such that they can't even keep up with their interest payments, while their earnings are moving in the wrong direction from the standpoint of their ability to pay, let alone get out from under their debt. (For what it is worth this seems to me a fairly reasonable standard.)