Home » Posts tagged 'zombie businesses'

Tag Archives: zombie businesses

Olduvai
Click on image to purchase

Olduvai III: Catacylsm
Click on image to purchase

Post categories

What’s to Be Done Now with All These Zombie Companies?

What’s to Be Done Now with All These Zombie Companies?

Saving the Zombies in Europe.

Europe’s zombie firms are multiplying like never before. In Germany, one of the few European economies that has weathered the virus crisis reasonably well, an estimated 550,000 firms — roughly one-sixth of the total — could already be classified as “zombies”, according to research by the credit agency Creditreform. It’s a similar story in Switzerland.

Zombie firms are over-leveraged, high-risk companies with a business model that is not remotely self-sustaining, since they need to constantly raise fresh money from new creditors to pay off existing creditors. According to the Bank for International Settlements’ definition, they are unable to cover debt servicing costs with their EBIT (earnings before interest and taxes) over an extended period.

The number of zombie companies has been rising across Europe and the Anglosphere — due to of two main factors:

  • Central banks’ easy money forever policies, which brought interest rates down to such low levels that even firms with a reasonable chance of default have been able to continue issuing debt at serviceable rates. Many large zombie firms have also been bailed out, in some cases more than once. Spanish green energy giant Abengoa has been bailed out three times in five years.
  • The tendency of poorly capitalized banks to continually roll over or restructure bad loans. This is particularly prevalent in parts of the Eurozone where banks are especially weak, such as Italy.

A Bank of America report from July posits that the UK accounts for a staggering one third of all zombie companies in Europe. They represent 20% of all companies in the U.K, up four percentage points since March, according to a new paper by the conservative think tank Onward. In the two hardest-hit sectors — accommodation and food services, and arts, entertainment and recreation — the proportion of zombie firms has soared by 9 and 11 percentage points respectively, to 23% and 26%.

…click on the above link to read the rest of the article…

The Zombie Companies Are Coming

The Zombie Companies Are Coming

Easy money is a curse for capitalism.

Through the first half of August – which is normally a quiet period for the bond market in the US – a total of $56 billion in junk bonds and leveraged loans were issued by junk-rated companies, according to S&P Global. That was nearly 50% higher than the prior records for the same period in 2012 and 2016, and more than double the amount issued in the entire month of August last year.

The Fed’s announcement on March 23rd that it would start buying corporate bonds and bond ETFs set off a huge rally in the bond market, including in the junk-bond market.

The rally started before the Fed ever actually bought the first bond. And then the Fed hardly bought anything by Fed standards. Through the end of July, it bought just $12 billion in corporate bonds and bond ETFs, including a minuscule $1.1 billion in junk bond ETFs. It’s not even a rounding error on its $7-trillion mountain of assets.

But the announcement was enough to trigger the biggest junk-debt chase in the shortest amount of time the world has likely ever seen. And it kept the zombies walking, and it generated a whole new generation of zombies too.

The junk-bond ETFs the Fed dabbled in hold junk-bonds issued by companies that have been taken over by Private Equity firms in leveraged buyouts, where the acquired company itself borrows the money to pay for its own acquisition. Leveraged buyouts produced the first big wave of bankruptcies among retailers that started years before the Pandemic, and included Toys R Us, now liquidated.

The junk bond ETFs that the Fed has bought hold these types of bonds, including bonds by PetSmart, which was taken over in a leveraged buyout by private-equity firm, BC Partners.

…click on the above link to read the rest of the article…

Dr. Fed Frankenstein Kept Alive by Zombies

Dr. Fed Frankenstein Kept Alive by Zombies 

Did you know Dr. Frankenstein created a monster that stays alive to this day by eating zombies? Neither did the zombies. Neither, apparently, did Dr. Frankenstein. In fact, the zombies, being braindead as zombies are, do not realize that they are also keeping alive the diabolical doctor who made the monster that is eating them.

This little article, however, is going to tell you how all of that has become the strange case of the world as we all know it today. And, at the end of the article, I’m going to give everyone access to the first “Patron Post” I wrote as my thank-you to supporters who chose to keep this blog alive at the close of last year. That post was titled “2019 Economic Headwinds Look Like Storm of the Century.” 

Before I do, I want to recap 2019 by shining a light on the occulted diabolical nature of the single most important economic event this past year … so that you can read the article in an appropriate frame of mind. You would not, after all, watch a horror movie without first turning out the lights to set the mood. In this case, however, I must also turn on a single small lamp to shine a light on the face of the monster hidden the dark corner of the banking world. Then we will be ready to review the article in context of all that transpired.

One purpose I had for laying out what I thought would be the prevailing headwinds in 2019 was, of course, to help people realize what they should keep their eyes on for their own sakes. That may or may not give them information they factor into investment decisions, but investments decisions are not at all what this blog is about.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
Click on image to purchase